Issue 116 January 2018 Lite by Asian Private Banker

www.asianprivatebanker.com

CEO EDITION

Issue 116

THE FINAL WORD Private banking leaders have their say on the industry P 8

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Industry in 2017: 5 key events

Industry: Bassam Salem: the exit interview

APB Mandate: Top 5 private banking investment trends in 2017

APB Mandate: Vontobel WMâ&#x20AC;&#x2122;s CIO: Three factors that will keep a lid on inflation

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CONTENTS ISSUE 116

Letter from the Editor

Echo Chamber Industry The industry in 2017: key events

CEO Andrew Shale Editor Sebastian Enberg Editorial Richard Otsuki Priyanka Boghani Charlene Cong Alice So Gigi Lam Liz Mak Managing Director Paris Shepherd Research Stratos Pourzitakis Business Development Sonia Lam Sam Chan Joanne Tse Olaide Ogungbesan Benjamin Yang

Digital Tristan Watkins Yiyang Zhou Cécile de Buor Evy Cheung Jacqueline Kwok Alice Wong Vivian Chong Events Koye Sun Shunta Kamba Vanessa Ng Finance & Operations Karman Wu Yuki Chan Sandy Lau Martina Ngai Head of Europe Madhuri Chatterjee Production DG3

Published by Key Positioning Limited 13B Greatmany Centre 111 Queen’s Road East Wanchai, Hong Kong Tel: Fax: Email:

+852 2529 1777 +852 3013 9984 info@asianprivatebanker.com

ISSN NO. 2076-5320

Advertorial BNY Mellon to expand PB distribution through the region

Industry The Final Word

Industry The Final Word: Industry trends

Industry Citi Private Bank’s Bassam Salem: The exit interview

Advertorial Noah Holdings: Delivering best practices to the globalising Chinese investor

Mandate Top 5 private banking investment trends in 2017

Industry The Final Word: Investment products and services

Regulations 2017’s key regulatory enforcements

Industry The Final Word: Regulations and compliance

Research 2017 Structured Products Report: Regulatory challenges and technological opportunities

Industry Morgan Stanley’s PWM clients reap benefits of bank’s ‘early’ bullishness on China

Industry Noah’s Kenny Lam says firm is prioritising quality growth over volumes

Industry The Final Word: Business performance

Mandate Vontobel WM’s CIO: Three factors that will keep a lid on inflation

Technology PBs using MiFID II-compliant digi-tools to reduce suitability stress

Industry The Final Word: Technology & Buzzwords

Mandate Factor-based investing: Complement or threat to hedge funds?

People Moves Movers and shakers

LETTER FROM THE EDITOR

small but growing number of senior wealth management practitioners are calling for a major refresh of private banking leadership in Asia. They say the current class of leaders is disconnected from tomorrow’s ‘millennial’ clients and short on cutting-edge ideas. They warn that today’s leaders need to harness disruptive forces and future-proof businesses to capture tomorrow’s opportunities, but are failing to do so effectively. As is customary here at Asian Private Banker, we reached out to some of Asia’s preeminent leaders in wealth management to share their perspectives on the state of the industry and their respective businesses. This year, we invited these individuals to respond to questions across five broad themes: industry, business performance, investments and services, regulation, and technology. Now I will say this: we gave respondents free rein and, for the most part, published their answers verbatim. So please judge for yourselves if the above views hold water. And please reach out to the editorial team at editor@asianprivatebanker.com if you wish to add your two cents. Welcome to Asian private banking in 2018.

Cheers,

Sebastian Enberg Editor Asian Private Banker

INDUSTRY

e ch o cham be r “We went from about 500 RMs to about 1,100 in three years. It was rough, but the market was a blue ocean at the time – if you look at the penetration rate of HNWIs using private wealth managers, it was probably around 15-18% versus about 5557% in the US.” Kenny Lam, group president, Noah Holdings “In China, we have a whole building of IT specialists that can do vast customisation on the systems that we acquire from the market. The off-the-shelf solution in the market may meet 60% of our needs. The IT team can fine-tune the system to fully meet our requirements.” Diana Chen, Huatai’s Hong Kong head of private wealth management and retail brokerage “This year [2017] our investment banking group again had very high market share in terms of the more interesting IPOs out of China. So naturally we in PWM were well positioned to benefit from this, in terms of attracting assets from the entrepreneurs of these newly listed businesses. So from the capital markets side, we definitely increased AUM from North Asia and China specifically.” Vivien Webb, co-head of sales, Morgan Stanley Private Wealth Management Asia [The ROA on the lower end segment] has been coming down and now it’s between 78 and 89 bps depending on the bank, on the investment and the state of the market. But the challenge the industry is facing is that they are targeting clients who are not really private banking clients. And, they [the banks] are putting together a platform that costs a lot of money.” Bassam Salem, Citi Private Bank’s outgoing Asia CEO

The industry in 2017: key events

China rewrote the rule book for wealth management Behind the heady AUM growth figures, ‘wealth management’ in China has in recent years become synonymous with the murky but lucrative and interconnected world of shadow financing between banks, trusts, wealth and asset managers, private equity and online finance firms. But Chinese regulators hardened their stance in 2017, striking the market in unison with a series of reforms including closing down channels for inter-industry regulatory arbitrage and upping investor disclosure requirements, forcing the industry to reconsider what wealth management is. At its epicentre, the regulatory drive has stimulated a number of high profile exits by internet wealth platforms focused on lending. Banks are no longer rolling over guaranteed wealth management products as they race to meet a 2019 compliance deadline. Private equity players bemoan that the changes will eat into returns and extend investment cycles for the long-term. The more sanguine, however, say that 2018 is shaping up to be a reboot year for the Chinese HNW market and only those firms that truly deliver value to clients in the form of long-term wealth planning solutions and asset allocation will flourish.

Investment banks make foray into asset management Following blockbuster fund-linked note trades in early 2017 - the industry raised an estimated US$3 billion in 1H17 through this note, including US$100 million through UBS WM in the first two weeks - investment banks demonstrated that their foray into

asset management by delivering structured products with an actively managed underlier was not a one-off phenomenon but a potentially long lasting trend. Wealth managers and investment banks followed up with a series of actively managed certificates (AMCs) which are being increasingly implemented into discretionary mandates.

ESG: All hype or here to stay? A common (mis)perception in Asia is that HNW investors don’t want ESG-compliant solutions because the overlay may incur a performance discount. Even so, the industry shifted up a gear in 2017, rolling out various ESG offerings ranging from a small set of new funds to the full implementation of new investment philosophies into platforms and processes. Deutsche Bank Wealth Management said that the industry is only at the beginning of the ESG journey with the approach set to enter the investment mainstream. While numerous private banks spoken to by Asian Private Banker said that ESG is being prioritised by toplevel management, BNP Paribas Wealth Management went one step further, launching an ESG discretionary portfolio management (DPM) solution in Asia. The private bank said that it constructs portfolios based on positive screening and best practices that take into account criteria beyond traditional financial metrics, in an effort to be “at the forefront of what will eventually be a growing trend in Asia”. Expect others to follow suit in 2018.

DPM continues to break new record-highs Asia’s private banking industry continues to make inroads in the discretionary portfolio 5

INDUSTRY

management space, growing DPM asset penetration beyond 2016’s record high of just over 8%. According to a survey conducted by Asian Private Banker in September 2017, nearly half of Asia’s private banks had grown their DPM assets by at least 10% YTD. Notably, a number of smaller private banks saw marked success, including UBP which in June said its DPM assets had increased by 35% in the 12 months following its Coutts acquisition. Meanwhile, regional DPM powerhouse, Bank of Singapore, told Asian Private Banker in October that DPM assets had grown by 30% YTD.

Emphasis on suitability and AML Asia’s regulators didn’t miss a beat in 2017, with Hong Kong authorities focusing on client suitability and Singapore’s MAS on AML. The year also brought its fair share of major regulatory events. Hong Kong’s Court of Appeal, for the first time, ruled against a private bank in a mis-selling case, while HSBC Private Bank (Suisse) SA Hong Kong was fined HK$400 million in November. Both instances highlight the importance of matching client risk profiles with the appropriate product. On the Singapore AML front, MAS continued its crackdown on activities surrounding Malaysia sovereign fund 1MDB, with MAS’ Ravi Menon publicly stating that it is an “absolute priority” of the regulator to restore the city-state’s integrity as a financial centre. The regulator is also investigating a suspicious US$1.4 million transaction from Guernsey that involved Standard Chartered as well as Singapore’s linkages to the Paradise Paper leak.

Private banks tackle tech disruption with platform renewals Private banks in 2017 persevered to deliver superior client experience and operating efficiency through costly front-to-back platform upgrades. These projects typically involved the uprooting and replacing of legacy systems. Ultimately, only a handful of institutions remained on schedule. Both Standard Chartered Private Bank and Julius Baer announced delays to their IT and core platform overhauls, while HSBC Private Banking maintains that it will go-live with its new Avaloq platform “soon”, three years after it signed up with the provider. UBS Wealth Management and BMO Private Bank both managed to go live with their core banking renewals on time.

Drive to build recurring revenue - through advisory and discretionary Buffeted by a slump in transactional volumes for much of 2016 and regulatory tightening around client suitability, Asia’s private banks in 6

2017 made a concerted effort to shore up recurring revenue streams. Funds penetration increased past 2016’s level of around 11%, while the average DPM penetration rate also increased. Interestingly, momentum also picked up around flat-fee advisory services - the most notable move coming from Credit Suisse, which rolled out CS Invest. A number of other banks have indicated that they are actively exploring flat-fee advisory or indeed plan to launch a service in 2018.

Major leadership changes at the top The industry saw an unusually high number of CEO changes at both regional and global levels in 2017. In Asia, and in chronological order: Pierre Masclet took on the role as CEO for Indosuez Wealth Management in Asia; JP Morgan Private Bank named Kwang Kam Shing as its new Asia CEO as Andrew Cohen was bumped up to an international role; Pierre Vrielinck became BNP Paribas Wealth Management’s regional head with Mignonne Cheng staying on as chairman; and Bassam Salem will leave the industry with Steven Lo taking over the reins as Citi Private Bank’s Asia CEO. Globally, EFG International’s Joachim Straehle retired after successfully integrating BSI’s business and Jürg Zeltner, UBS Wealth Management’s president also retired and will be replaced by Martin Blessing. Finally, Boris Collardi left Julius Baer to join rival pure play Pictet in Switzerland - a move that surprised the industry. Expect Asia to see a lot more of Collardi going forward.

Chinese private banking celebrates 10th anniversary as many eye offshore Furious growth domestically - China’s top 10 private banks have averaged 35% AUM growth rate since 2012, according to APB data - caught the industry’s attention in 2017; but arguably the most compelling trend was the continued expansion of Chinese private banks beyond their home market. Armed with deep pockets, oodles of patience and an understanding of their clients’ needs for international diversification, a number of lenders expanded their offshore presences. Both CMB and CCB opened dedicated private banking branches in Singapore and the former opened a wealth management centre in Hong Kong; Minsheng cut the ribbon on a private bank and wealth management centre in IFC 2, and BoCom announced that it will pump HK$7.9 billion into a new HK subsidiary that will house private banking activities. Meanwhile wealth management firm Noah Holdings expanded its US business and established a foothold in Canada and Australia.

ADVERTORIAL

BNY Mellon to expand PB distribution through the region

NY Mellon Investment Management (BNY Mellon IM), the world’s largest multi-boutique asset manager, has set its sights on Asia Pacific’s private wealth market and will prioritise distribution through both global and local private banks in 2018 to meet growing demand from the region’s high net worth investors for its solutions.

BNY Mellon IM has big plans for Asia intermediary business “Our distribution business has been mainly focused on the institutional side,” says Nicolas Kopitsis, BNY Mellon IM’s head of intermediary distribution, CEO Singapore. “However, given the great opportunities within the growing private wealth industry in the region and the strong connections and expertise that we have, we are planning to further grow our Asian intermediary business going forward.” The timing couldn’t be more astute. Asia’s private banks have enjoyed something of a vintage year - particularly in Greater China - but the fund houses are still not meeting the complex and demanding needs of private banks and their clients. “To date, the intermediary business here in Asia has not been serviced correctly in my view,” says Kopitsis, explaining that because many private banking gatekeepers continue to be situated in Europe, asset managers need to be more globally coordinated in order to properly cover private banks rather than purely focusing on local investors. So what makes a successful asset manager? Kopitsis points to two fundamental “pillars”: manufacturing and distribution. BNY Mellon IM employs a multi-boutique model that encompasses 12 different asset managers across every asset class which manages a total of US$1.8 trillion in AUM globally. Through this unique setup, Kopitsis believes the firm is well-positioned to exceed in both production and distribution, therefore bringing superior servicing to private banks throughout Asia.

Nicolas Kopitsis Head of Intermediary Distribution CEO Singapore BNY Mellon Investment Management

Lindsay Wright Head of Distribution, & Co-Head of Investment Management, APAC BNY Mellon Investment Management, Hong Kong

attractive risk-adjusted performance and, year-to-date, both strategies have gained a significant amount of traction from investors. “European loans provide a similar level of income as high yield bonds due to their sub-investment grade, but they are senior secured so investors have less volatility,” Kopitsis says. Since the introduction of Basel III, the banking sector overall has undergone huge improvement. In addition, as European loan rates tend to be floating in nature, investors typically take less duration risk when compared with investing in fixed rates, thereby making European loans a compelling class at this point in time. Alcentra, one of BNY Mellon IM’s 12 boutiques, focuses on sub-investment grade debt markets, with a track record of investing in loans dating back to 2002. Another strategy garnering significant interest from clients is global shortdated high yield, he points out. Specifically, global high yield typically has duration of around five years with 5.5% yield on average, however shortdated bonds have only 1.5 years in duration with slightly lower yield at 4.5%.

“Each investment manager has its own proprietary investment processes without an overall CIO house view, so the boutiques only need to focus on generating alpha, while we, on the BNY Mellon side, take care of the overall operations, marketing, and distribution,” he explains.

“Investors forsake 1% yield but they would receive less volatility when investing in the short-duration space,” explains Kopitsis. “Also, due to the short-dated nature, this type of paper would roll off each time when bonds mature, so we can reinvest in higher rates if interest rates are rising.”

In addition, as most of the private banks currently operate under ‘guided architecture’ conditions, BNY Mellon IM’s ability to establish distribution agreements and provide access to 12 unique sets of capabilities makes the model even more competitive, Kopitsis adds.

The BNY Mellon Global Short-Dated High Yield Bond Fund, managed by Insight Investment, saw a 2.5% return on a six-month cumulative basis, significantly beating the benchmark, Cash Benchmark LIBOR USD 3 month’s 0.7%.

In this rising rate environment, where do the opportunities lie and what are clients looking for? Asian investors’ ‘hunt for yield’ is not a new phenomenon; yet in this low but rising rate environment, this perennial search is becoming all the more difficult. Against this backdrop, Kopitsis believes European senior secured loans and global short-dated high yield will provide

For more information please contact: Phoebe Ao Ieong Head of Intermediary Distribution – Greater China Phoebe.AoIeong@bnymellon.com

INDUSTRY

The Final Word

INDUSTRY

THE ROSTER AL

Amy Lo chairman and head Greater China, UBS Wealth Management and country head, UBS Hong Kong Branch

Wu Chunjiang assistant general manager, private banking department, China Merchants Bank

Lok Yim head of Asia Pacific, Deutsche Bank Wealth Management

Michael Blake CEO private banking Asia, Union Bancaire PrivĂŠe

Pierre Vrielinck CEO, wealth management Asia Pacific, BNP Paribas

Ron Lee head of private wealth management, Asia Pacific, Goldman Sachs

Claude Haberer Asia CEO, Pictet Wealth Management

OYF

Ong Yeng Fang managing director and head of private bank, UOB

DVD

Didier von Daeniken global head, private banking & wealth management, Standard Chartered Bank

Pierre Masclet Asia CEO and Singapore branch manager, Indosuez Wealth Management

TSS

Tan Su Shan group head of consumer banking & wealth management, DBS Bank

INDUSTRY

The Final Word:

INDUSTRY TRENDS: Some say tech or non-traditional players; some say the expansion of Chinese banks; some say regulatory tightening; but what do you believe will be the greatest source of disruption for the Asia offshore industry in the coming years? LY: Given the proposition of Deutsche Bank Wealth Management, I would say tech, which in fact, is disrupting many other industries. Technology on one hand is disrupting the way we do our banking business; and on the other hand is redefining clients’ demands and expectations on their banking activities. Take us as an example. We are investing EUR 65 million globally in client-focused digital technology and to enhance our client-related systems. Instead of sharing market information internally via emails and face-to-face briefings, we offer an internal app to our relationship managers who can access market news and asset class updates any time, anywhere. The technology empowers them to engage even more closely with clients. We offer “Deutsche Wealth Online” to our clients who can access their accounts and investment information seamlessly and securely. To be relevant to our clients, we have to be proactive in offering such digital tools. At the same time, we have to get ourselves familiar with and prepared for the impact of cyber threats with the involvement of more thirdparty vendors, evolving tech and data exchanges. As mentioned above, tech is disrupting other industries. Our regulators will turn to tech too. They need to supervise our more tech-driven industry more effectively by adopting a wide range of data gathering and analytical tools. RL: One of the key drivers of change will be the continued growth of China’s tech and other emerging industries, which has created a new generation of entrepreneurs. These business owners are not only adding to the overall wealth pool, they are also more open to seeking professional advice in managing and passing on their wealth. DVD: Digitisation is transforming the financial services industry at great speed and private banking is no exception. Our clients lead very “digital” lifestyles and they expect the same levels of online engagement, speed and convenience from their banks as they do from their favourite brands or travel portals. We see innovative technology solutions such as robo advisory as a complement to the “human“ advisor model: they reduce the time required to deliver advice, automate some basic investment decisions and allow relationship managers to spend more time focusing on meeting a client’s needs. While there’s no doubt that private banks are evolving, clients will continue to need and value the traditional expertise of their wealth manager. It will still be about helping clients to invest wisely and stay the course during down markets, and building enduring relationships based on a proven track record and trust. CH: On one hand, regulatory tightening is something that is now 10

constant and regular and therefore continues to change the way we conduct our business. Chinese banks have been investing a lot in private banking. We may not feel the competition as so intense right now but I think it will become so over the next five years. But as has happened elsewhere - and Europe is a very good example of this - as and when local markets mature, wealth to a greater extent will remain local. Therefore, onshore private banking [in Asia] will become a more pronounced theme. It may not be huge at this stage but it will develop. On the other hand, for the foreseeable future, we will still have pretty controlled local markets with tight regulations that limit the availability of international investments for local HNWIs. Also, there is the issue of political risk in a number of Asian countries. Combined, these are two very powerful forces that will continue to support the offshore industry for very legitimate reasons, which are the need to have access to international investments and to safeguard and protect the assets of wealthy entrepreneurs. It must be said, though, that because we are seeing such an increase in wealth in Asia, offshore centres and developing onshore markets have room to grow. TSS: For banks looking to create a sustainable wealth management business here in Asia, there are a few other things to consider. Firstly, it is the bank’s ability to build scale, be sustainable and invest for the future. Secondly, banks must be able to serve the local and global needs of Asian clients. It is not enough to just bring a western platform to Asia and do a “plug and play”. Clients here demand specific Asian solutions that may require specific customisation to local currencies, local assets and liquidity solutions. Hence, it behooves banks here to have a deep understanding of the Asian landscape and can value-add to clients in this aspect. Thirdly, it’s the bank’s ability to provide liquidity and credit solutions to these clients, many of whom run family businesses which may have liquidity or structuring needs. In Asia, where the wealth management process is intrinsically tied to the wealth creation process, the banks who can play a role in the business banking side of these clients and to combine this with a highly relevant wealth structuring and wealth management solution, should stand to win long-term market share. Whilst some foreign players have left the scene, there are several who are still fairly dominant here. These are primarily the large Swiss and US banks who have managed to build scale in their private banking businesses either through long-term organic growth or through combing their wealth management business with a retail, corporate/ investment banking or asset management business. That said, there remains more scope and opportunities for dominant local or regional players like DBS to gain market share. We believe the “Big Techs” with large platforms are the ones we should be more concerned with.

INDUSTRY

Citi Private Bank’s Bassam Salem: the exit interview

sian Private Banker sits down with Bassam Salem, months before he retires as Citi Private Bank’s Asia CEO, to speak about his legacy.

Bassam, let’s start with your transition between you and your successor, Steven Lo. Bassam Salem You’ve chosen someone who has been with the bank, who is a local and has front-line experience which means he will not come in with a heavy corporate mindset. [The transition] has been very harmonious. And yes, Lo’s been with us for 26 years. He started with Citi in Toronto. He has also worked in New York for a while before returning to Hong Kong and joining the UHNW team. Importantly, he was with us during the financial crisis, which was a tough time. A lot of people decided to jump ship. Those who stayed, rolled up their sleeves, dealt with the clients’ margin calls and worked on keeping assets. Steven was one of them. I’m happy he is the new leader. It’s been a good transition.

So you leave a happy ship behind you? Yes, a happy ship and performances have been great this year. This year the private bank in Asia is the best performing business for Citi in the region and the private bank globally. We are up 23% YoY in revenues.

Why has this year been the best year? Because of a variety of things we have been working on over the last few years including building our managed investments business. Over the years, building our annuity business was very important. So much so that today we can say that half of our investment revenues are from managed investments. We have really listened to our clients and what they want. They want very focused products, for example, real estate and private equity. In the past when we launched a private equity fund, we would raise US$ 45-50 million. Last year, we typically raised US$200-US$300 million per product launch. This reflects the fact that we are listening carefully to what our clients want and getting this right is well reflected in their confidence to invest in us. Performance has been outstanding in the private equity space. The average compound growth rate for the last two years has been in the 20-22% range. And, every region has performed well in terms of revenues generated this year. China was up by more than 50%, Taiwan was up by 25%, ASEAN was up by 20%, HK was up by 20%, India onshore was a bit less, the NRI business also up.

How is your discretionary business looking at the moment? 12

This business has also grown very rapidly. If you recall, Citi had sold its asset management arm to Legg Mason so initially, it was a struggle to convince the bank to restart the business. There was already a team in London, a team in New York and so I was asked, why do you need a team in Hong Kong? I kept saying, well, you send me bread but I eat rice. Clients here want Asian equities. They want Asian fixed income. Eventually, we put together a team, and the performance was fantastic. Our Asian equities performance was up by close to 50%. After the financial crisis, we realised that clients want proximity to those managing their money and transparency.

Is it fair to say that from the time you entered this role to the time you’re leaving it, Citi PB in Asia is now better insulated from market downturns like those that we saw last year? Yes. When I first joined, income from annuity accounted for 20% of our investments business while capital markets accounted for 80%. Today 50% is from capital markets and 50% from the annuity business. Now I know that in Asia around 70% of HNW business is from annuity income, but I take this figure with a pinch of salt because margin lending is often included in annuities. At the moment, markets are volatile, and you have margin calls. Therefore clients will go for loans. It’s a double whammy. We just have to be cautious.

Over the last six years as APAC CEO, what are some of your greatest achievements? Our client acquisition has been very, very strong. We have kept our head down and worked very hard. We also brought the cost-income ratio down from 84-86% from when I first started to between 58-60% today. And, once we demonstrated that we had a profitable business, we received more resources to hire. Our China team grew at a CAGR of 55% for the last six years. Our NRI team, which we lost during the financial crisis and had to rebuild, grew at a CAGR of close to 40% for the same period. We have also started investing in our Hong Kong, Taiwan and ASEAN teams and the results have begun to show. As a result of these hiring targets, client acquisition has been very strong.

What do you think of the strategy of growing through acquiring? Some banks are growing by making more acquisitions, and it’s a very good strategy. I did it at EFG for many years, but this is not what we do at Citi. Our focus has been on existing clients and acquiring new clients.

You have placed a lot of importance on managing your cost income ratio. You can tackle cost on both sides of the balance sheet so how did you go about refining the business?

INDUSTRY

It is cost and revenues. Let’s start with costs. We exited Korea, Taiwan and Indonesia. All these onshore businesses are great for my partners at Citigold Private Client, but none of the onshore markets in Asia has very sophisticated capital markets for true private banking – which I always define as starting with US$10 million in investable assets. This has always been our audience. However, everyone on the street is competing for clients between US$1 million and US$10 million. It’s not that they are bad clients, they are great clients for the right segment.

How has the ROA changed on that lower end segment? Was it significantly lower when you first started? It was actually around 110 bps before the financial crisis. It has been coming down and now it’s between 78 and 89 bps depending on the bank, on the investment and the state of the market. But the challenge the industry is facing is that they are targeting clients who are not really private banking clients. And, they [the banks] are putting together a platform that costs a lot of money. In private banking, we need to place the clients in the right segment. Also, banks in Asia do not charge custody fees. But institutional clients pay custody fees to their custodian. Why would I give it for free? There is a great deal of servicing involved in maintaining a custody account, and that level of servicing has value. So we started charging custody fees. For the right client, you can have an exception, but for smaller relationships, we cannot provide the service for free.

Without naming banks, if you look at the industry right now, what percentage of banks do you think right now are at risk because their model is not configured? You have seen so many exits in the industry, and you would not have thought they would exit. These are not new operators. You have Barclays, Societe Generale, Coutts, Merrill Lynch – they did not decide to exit because one day they woke up and said hey how about we exit Asia? They tried everything they could, and the proposition of being in Asia didn’t make sense for them anymore. Those big decisions had to be made.

what clients want. It is a different world out here and not one that can be understood through industry reports or third-party analyses.

Some would say that the Chinese private banks are in a better position to set up a branch. They are able to target the US$1-10 million segment and surround themselves with more resources than perhaps a global bank would be prepared to stomach anymore. They can also afford to suck up the costs as they gather wallet share. What is your view on this growing segment? Chinese banks are very interesting. They have a massively dominant position in the wealth space in China. I would also suggest that in China, it is predominantly affluent HNW. The moment they reach a certain level, they would rather bank offshore because the products that they need are simply not available in China. But yes they have a dominant position in the onshore market. They would do well to acquire to gain product expertise – I wouldn’t suggest buying another private bank but rather an asset manager, a private equity shop, etc. They also need to upgrade their culture and corporate structure as they become more internationalised.

Let’s look at the other onshore market you have chosen to stay in – India. Why is it important to have an onshore India presence? I believe if you want to build your NRI business, you need to have an onshore [India] presence. Indian clients, whether they are in Hong Kong, Singapore, London, Dubai – will always have connectivity with India. Unlike China, India is a country where we are allowed to have a fully-fledged presence in the name of Citi. I know China is relaxing but if you want to have a brokerage business you can only own 40%, and you need a local partner, which means you do 100% of the work, you get 40% of the revenue. That’s not a good business proposition. In India, I can have 100% [ownership].

One final message for your fellow private banking heads: Focus on training new talent, focus on profitability.

After the financial crisis, banks are a lot more focused on return on capital, return on investment, the businesses they want to be in and the businesses they don’t want to be in. Hence we saw a lot of exits. Still, there are a lot of private banks coming to Asia because they see the growth here but what they do not see is that the growth is predominantly onshore. It’s in China onshore, India onshore and Indonesia onshore. And in those markets, most banks are not adequately structured to handle the onshore wealth.

One final message for Asia’s regulators:

Banks that see that wealth is growing in Asia end up finding a highly regulated market.

One final message for prospective clients who are looking for a bank to work with:

Bassam, if you were to give your fellow leaders in the industry some advice. What would it be? My message to the boards of various banks sitting outside of Asia would be that it is necessary to be in the region and to learn first-hand what the landscape here is like, including how markets function and

You have done enough and hire more people with a better understanding of the industry.

One final message for fresh graduates and talent looking to enter the industry: The holy grail is not in banking. We are 17 years into the new century, and the growth sector is digital.

Understand your private banker as much as you understand the company he or she works for. Choose your private banker carefully.

One final message for your colleagues at Citi: Continue to work as a team and care for each other – this is how we will succeed. 13

ADVERTORIAL

Noah Holdings: Delivering best practices to the globalising Chinese investor

hina’s emergent wealth management industry has made significant strides over the past decade on the back of rapid wealth creation and the country’s incrementally liberalising economy. Domestically, early movers have amassed considerable scale in a short period of time and are now expanding their footprints by setting down roots in key offshore markets in a bid to service the international needs of China’s growing HNWI segment. Standing out amongst its peers, Noah Holdings (Noah) has forged a reputation as an innovator and driver of professionalisation in Chinese wealth management and is fast gaining recognition in the international arena for providing unique and quality investment solutions for globalised HNWIs demanding global diversification. Founded in 2005 on the back of a management buyout of XiangCai Securities’ private banking division, Noah today is the largest independent wealth manager in China and a leading asset management firm, with a dedicated presence in over 76 cities across top-tier centres and provincial capitals and over 205 branches nationwide. It is also a ‘firm of firsts’, having become the first Chinese wealth manager to list on the NYSE, the first to receive type 1, 4 and 9 licences from Hong Kong’s Securities and Futures Commission, the first to establish a Silicon Valley office with a complete investment team and, most recently, the first to receive an investment grade rating by S&P Global. Now, having built a firm base in its home market, Noah has set its sights on becoming a provider of leading wealth management and asset management solutions to HNW clients around the world. To that end, Noah is developing a comprehensive ecosystem of services and products tailored to the needs of increasingly sophisticated and internationally focused Chinese investors, who are hungry for diversification and are eager to learn. “Our focus going forward is to further explore and expand overseas distribution channels and establish a relationship manager service network in key global markets where there is a large population of high net worth Chinese,” says group president, Kenny Lam, who points out that globalising Chinese clients are warming to the ideas of family office setups and the delegation of investment management, while also demanding stable returns – a recent shift that goes hand-in-hand with a growing appetite for wealth preservation, as opposed to wealth accumulation. Further, these clients are looking for currency, industry and asset class diversification – demands that the group is able to meet through its alternative asset management arm, Gopher Asset Management.

Ms. Jingbo Wang, co-founder, chairman and CEO, Noah Holdings and Mr. Zhe Yin, CEO of Gopher Asset Management Gopher specialises in fund-of-funds (FoF) management, focusing on private equity (PE) – it has the largest and most advanced PE FoF offering in China – real estate investments, hedge funds, fixed income and public market FoFs. The firm benefits from its access to top performing PE and venture capital funds worldwide, partly through its affiliation with Sequoia Capital, a Noah shareholder that initially invested in the firm in 2007. Moreover, Gopher is moving to capitalise on its access to leading third-party hedge fund products by scaling up its offering from a FoF approach to a manager-of-manager (MoM) strategy, whereby the firm constructs portfolios after carefully selecting a handful of elite hedge fund managers. In fixed income – a hot topic in the region given that there remains strong demand for income-bearing investments – the group has diversified its proposition from residential real estate by offering clients exposure to supply chain financing, consumer loans, auto financing and mezzanine debt.

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According to Mr. Lam, Noah’s focus on international and alternative products means it has differentiated itself from the “usual plain vanilla approach” taken by most Chinese banks and insurers, many of which are focused on the lower end of the wealth spectrum. Wealthier clients, based on Noah’s in-house research, have a strong preference for alternative investments. The 2016 Noah Wealth Management White Book shows that an overwhelming proportion of HNW Chinese clients intend to increase their allocations towards PE/ VC, offshore assets and fixed income.

Proof in the numbers As evidenced by Noah’s most recent earnings report, the efforts to bolster its product capabilities are bearing fruit. In the three months through June, Noah distributed RMB33 billion worth of wealth management products, a 19% increase compared with the same period last year. At the same time, Noah has been supplementing its product suite with a growing range of client services designed for the increasingly sophisticated Chinese client. For instance, the group now offers trust and family office services, insurance and philanthropy; and to ensure that clients fully understand the intricacies of these important wealth planning tools, Noah launched its Enoch Education programme in 2013, a client training scheme that focuses on entrepreneurship, family governance and estate planning. Indeed, Noah has not only dedicated significant resources to upskill its own talent pool, but has placed an emphasis on client education on the basis that China’s wealth management industry, for it to mature, requires investors to better understand the virtues of asset allocation and the relationship between risk and return. Owing to its broadened ecosystem of products and services, along with the significant growth in wealth in the country, Noah’s client base has swelled. At the end of June, the group had 164,728 clients – a 43% increase from the previous year – the vast majority of whom are business owners. At the same time, Gopher oversaw client assets worth RMB138.7 billion, or 37% more than the previous year.

Risk control: raising the bar As China’s wealth management industry matures, responsible risk management is becoming more critical than ever, especially as investors are exposed to a universe of products that vary in quality. To quote Noah’s Lam, “growth must go hand in hand with the right degree of risk management” – and that is exactly how Noah approaches product due diligence. Noah’s frontline of 1,259 relationship managers – for context, industry titan UBS Wealth Management had 1,008 client advisors in the Asia Pacific at last count – is supported by 180 in-house product professionals, who screen and perform stringent due diligence processes on 2,000 projects each year, ultimately green-lighting a fraction. Moreover, under the company’s full-cycle rating and risk management system, it screens accredited investors, qualified fund managers and products in order to mitigate financial and compliance risks.

“Within our active post monitoring of products and managers, less than 1% of the US$70 billion we have distributed or managed so far are in a ‘requiring active and constant monitoring’ category,” says Mr. Lam. Similarly, Noah’s aforementioned education initiatives, which include client events, university-grade programmes and communication campaigns, are partly aimed at raising investors’ risk awareness. Undoubtedly, the company’s stringent risk management processes and strong market positioning played a significant role in it receiving an investment grade rating from S&P Global Ratings in July. “Noah’s prudent risk appetite and risk management practices also support its business position in China and resilient financial performance, in our view,” the ratings agency said in a statement, adding that the wealth manager clearly communicates investment risks to its clients.

International expansion gains traction Noah’s global push is premised on servicing HNW Chinese the world over, and its most recent results reflect the progress it has made in this regard. As of June 2017, the firm’s offshore AUM rose 23% year on year to reach RMB 18.2 billion. Beyond China, the firm has a presence in Hong Kong, Taiwan, the US and Canada, and it was the first Chinese firm to establish a trust business in Jersey. It intends to build on this base by expanding into geographies where there are large populations of HNW Chinese, including Australia. “We believe demand from [Chinese] high net worth clients for global asset allocation is a structural trend,” Mr. Lam said in May. More recently, Noah has established a Global Family Office, whose clients are serviced by a pool of 80 relationship managers – or family office bankers – who are surrounded by a team from across the firm. The decision to ‘go global’ with its family office offering was largely driven by what the firm describes as a “structural change” in Chinese clients’ perceptions of discretionary portfolio management. “Other players have limited exposure to the private equity and venture capital space and less exposure than we do to the real estate space,” says William Ma, CIO for Noah Holdings (Hong Kong). “If you look at our all-round endowment approach to portfolios, we believe those components are essential. Also, we are targeting about 30% offshore assets for clients’ portfolios in China through official channels.” Indeed, the onshore and offshore opportunity for Noah and its peers is immense, considering that the number of HNW families in China is forecast to nearly double from 2.1 million in 2016 to 4 million in 2021. With its broadening network of offshore centres, sound risk policies and its industry-leading approach to developing a comprehensive suite of products and services, Noah is well placed to cater to the needs of the new age Chinese investor.

A P B M A N DAT E

Top 5 private banking investment trends in 2017

PB Mandate digs into the past interviews and stories listing the five most important products and investments trends within Asia’s private banking industry in 2017.

1) Equity appetite rebounds After a lacklustre 2015 and 2016, equity markets turned the corner in 2017 following the Trump election victory which triggered a global rally. Although Asian HNWIs were initially reluctant to participate, often citing stretched valuations and geopolitical uncertainties as core reasons, investors quickly caught on to what appeared to be a sustained bull run. As a means to generate sustainable long-term returns that can withstand short-term shocks, private banking clients sought investments in thematic equity strategies based on so-called ‘megatrends’ that are expected to perform in a growth cycle. “We are definitely seeing growing investor appetite in thematic investing, including in the areas of robotics and artificial intelligence. The fact that the NASDAQ Composite Index has recently hit an alltime high is clearly adding to the demand for more technology-driven thematic ideas,” said Sean Quek, head of equity research at Bank of Singapore, in a report published early 2017. What’s more, local equity markets outperformed in 2017 which spelt robust demand from investors that have traditionally exhibited strong home bias. For example, BNP Paribas observed strong equity structured product demand, especially for Chinese underliers, paralleling its thematic strategy that focuses on ‘New China’, the ongoing transition of the Chinese economy into a consumption-driven one.

2) Investment banks capture share of demand for active management In 2017, the investment banking industry demonstrated that it is still relevant to private banks, even as the share of revenue continues to tilt towards fee-based income, a space traditionally dominated by asset managers. The first notable milestone was the blockbuster success of fund-linked note distribution in Asia, which was believed to have registered US$3 billion of inflows by the first half, capitalising on the fears of a bond correction while still chasing yield from favoured managers. But investment banks were not finished with just carving a share from fund advisory businesses. In the second half of 2017, actively managed certificates (AMC) began to emerge as a viable instrument substitute for mutual funds, as discretionary managers in the region sought quick and easy means of launching new mandates based on a plethora of themes. 16

Tuan Huynh, Asia CIO and head of discretionary portfolio management at Deutsche Bank Wealth Management, said he began to explore opportunities in AMCs after observing “strong success” from fund-linked notes. “Moving forward, AMCs can be used as a quick, low-cost pipeline to gauge client interest, alongside the added benefits of various structured product features, before fully launching new funds or discretionary mandates,” he said.

3) DPM continues to break new record-highs Asia’s private banking industry continues to make inroads into growing discretionary portfolio management (DPM) assets, and 2017 proved to be another year of records for the business line. In June 2017, APB Mandate revealed that UBP had grown its DPM assets by 35% in the 12 months after it acquired Coutts’ international business in April 2016. Similarly, Bank of Singapore’s DPM assets grew 30% year-to-date. Still, relative to Europe, Asia’s DPM penetration lags behind and has significant room to go. According to APB Mandate data, the average DPM penetration rate within Asia’s private banks was around 8% in 2016-end, compared with Europe’s 20%.

4) Fixed income demand persists Despite concerns about rate hike risk, the hunt for yield persists in Asia and investors continue to diversify their holdings. Initial fears of potential inflation and overly hawkish monetary policy led to investor demand for floating rate exposure in Asia. Julius Baer, for example, raised US$288m for investment grade floating rate solution. But soon sentiments recovered. As the market believed the rate environment might remain benign, investors began chasing yield more aggressively, most notably through emerging market debt.

5) Hedge funds return Given that volatility is set to rise, and valuations of both equity and fixed income markets appeared stretched, private banks believe that alternative investments especially hedge funds are poised for a comeback. After registering some US$109.8 billion in inflows in 2016, hedge funds saw inflows amounting to US$25 billion in the first half of 2017, according to Preqin data. “Being in a later stage of the market cycle now, and with rising volatility, more dispersion and lower correlations, I see a better case again for active management and also flexible approaches, and this is where hedge funds come in,” Gunther Jost, co-head of hedge funds for the Asia Pacific at UBS Wealth Management said.

INDUSTRY

The Final Word:

INVESTMENT PRODUCTS AND SERVICES Do you expect ESG investing to take off in Asia in the near term or is the region too early for significant adoption? Just how much of a priority is it for you/your bank to offer ESG solutions to clients in 2018? LY: ESG is still at an early stage in Asia. Having said that, we see more and more of our clients setting up foundations to give back to society. Focus of the investments will be ESG related, so we do expect ESG to pick up over the next few years. DVD: In our interactions with multi-generation clients we see that as wealth changes hands to a socially conscious millennial generation, the demand for ESG is set to grow significantly. Our wealth management advisory team’s proprietary research predicts that AUM in sustainable, responsible, impact investments is set to grow to as much as US$400 billion by 2020, driven by millennial wealth. At Standard Chartered, ESG investing is something we are committed to. We are gearing up to meeting this growing demand and have recently launched a number of new funds. The Parvest Aqua fund looks to capture growth in water-related investments, while the Allianz Global Sustainability Fund and Blackrock Impact World Equity Fund look to invest in sustainable business practices. These funds have generated competitive financial returns in tandem with making a positive impact on society, making them highly attractive for investors. AL: ESG investing is truly, and already, taking off in Asia. We have witnessed growing awareness of and interest in sustainable investing

from our clients in the region, across segments ranging from women, millennials, the next generation, UHNW individuals to family offices. Clients are particularly keen to explore opportunities in impact investing, which allows them to combine investments with their passions and create tangible impacts on society beyond their financial returns. We have seen our Asian clients embracing innovative investment opportunities in sectors such as providing access to primary healthcare, affordable education, oncology, or microfinance. 50% or even more of the commitments in two of our latest impact investment opportunities are from our clients in Asia. Further, our recent UBS Family Office report 2017 finds that sustainable, impact and ESG investments are increasingly important to the next generation of wealth holders. 28.3% of family offices globally are currently engaged in impact investing. In APAC, 26.7% said that they are involved in impact investing. TSS: We observe ESG strategies beginning to gain some interest among clients and it is an area that DBS is actively developing. With some evidence suggesting that ESG-oriented investing translates to sustainable and better returns, we are also finding ESG considerations to be increasingly of interest to clients and asset managers for reasons beyond idealism.

Do you expect to see significant client adoption of pay-for-advice (flat-fee active advisory) offerings in Asia in 2018, and do private banks risk losing a significant amount of what was previously classified as execution-only business? PV: We are committed to working in the best interests of our clients. In response to client demand, we launched MyAdvisory last year; it is a contractual service which provides a high touch customised portfolio-based advisory service to clients by taking into account their individual investment and risk-adjusted return preferences with transparent fee models. We offer the option where clients will be charged a competitive all-in fee per year, while the opportunity exists to go for a hybrid fee model combining both advisory and brokerage fees. The response so far has been very encouraging, and we will be launching a digital version of this offering in the second quarter of 2018. RL: Our fee-based advisory business has been growing steadily in the past few years. Fee-based inflows hit a record this year, contributing to an overall increase in assets and reflecting our evolution to a business model more focused on becoming our clients’ trusted advisor. MB: We see a definite trend away from execution only to advisory services. The industry has been talking about such a transition for many years, but 2017 seems to be the year of concrete action. I am

not sure this necessarily means a wholesale move to flat-fee advisory services. Our approach has been to offer advisory clients flexibility in fee arrangements, from all-in-fees to a hybrid model. OYF: Clients who like to trade will prefer a flat-fee advisory model as it will be more cost efficient when they trade a lot. For banks, this model may also provide more stable and recurring income. We expect that the flat-fee advisory model will gain wider adoption in Asia, but at a slower pace than elsewhere. This is because while Asian clients like to trade, they are also more willing to hold longer-term investment views or choose to be self-directed in their investment. For these clients, a traditional transaction-based model will still be preferred. CH: We have discretionary penetration excluding funds sold to advisory clients of about 20%. Even though we’ve practically quadrupled our AUM in Asia over the past seven years, we have kept the same discretionary penetration rate. Having said that, Asia is a region where advisory is very important and we have of course more advisory clients than we do discretionary. Generally, flat fee is something that is developing year-by-year. 17

R E G U L AT I O N S

2017’s key regulatory enforcements 2017 has seen its fair share of regulatory events for Asia’s private banking industry, including multiple enforcement actions brought by the region’s watchdogs against individuals and institutions alike. Arguably the most high-profile incident involved HSBC’s legacy unit, HSBC Private Bank (Suisse) Hong Kong branch, which was slapped with a record HK$400 million fine and had two licences revoked as the result of a mis-selling case involving Lehman Brothers-linked structures that went all the way to the SFC’s Appeals Tribunal. Loose ends tied on 1MDB

On the 1MDB case which shook up Asia’s private banking scene in 2016, punitive action continued throughout 2017, with the Singapore regulator doling out S$29.1 million in fines across eight banks. Regulators in Hong Kong and Luxembourg also got in on the action. Meanwhile, a $1.4 billion asset transfer conducted by Standard Chartered attracted the attention of regulators in Guernsey, Singapore and Indonesia. Lawyers said the transfer was likely done to ‘defer’ CRS obligations.

1MBD-related enforcements continued in 2017, with the Monetary Authority of Singapore fining Credit Suisse S$700,000 and UOB S$900,000 in May. These were the smallest fines dished out as a result of its investigations into transactions involving the Malaysian sovereign fund. Meanwhile, Yeo Jiawei, the former BSI banker, received a jail term that was subsequently extended from 30 to 54 months. Prohibition orders were also issued to two representatives from financial institutions in November. In Hong Kong, HKMA fined Coutts Hong Kong HK$7 million in April for its failure to identify if its clients were politically exposed persons and further KYC deficiencies.

Precedentsetting misselling ruling against ING Asia PB

Hong Kong’s Court of Appeal set a precedent when it ruled against ING Asia Private Bank (now Bank of Singapore) in a mis-selling case brought against the bank by investors who were elderly at the time they opened accounts.

StandChart transaction investigated

Standard Chartered came under scrutiny from regulators in Singapore, Guernsey and Indonesia, following a US$1.4 billion transferral of assets in 2015, mainly from Indonesian clients, from Guernsey to Singapore, before the CRS regime was implemented in Guernsey in 2016.

Even though one lawyer stated that it is unlikely that similar cases will arise after new suitability requirements came into effect in June 2017, it is also plausible that dissatisfied investors will study the judgment carefully to see whether its reasoning can be extended to their own circumstances in other mis-selling cases.

81 Indonesian businessmen were involved. The Indonesian regulator said that they are all taxpayers. 62 took part in Indonesia’s tax amnesty programme, which concluded in 2017. While no enforcement action has been taken by any of the regulators, the bank said that the transaction was ‘proactively reported’ to relevant watchdogs. Lawyers said that the transaction was likely done to ‘defer’ CRS obligations. Record fines on HSBC

The Securities and Futures Appeals Tribunal (SFAT) published its ruling on a mis-selling case brought against HSBC Private Bank (Suisse) SA Hong Kong branch, dating back to the pre-GFC era. The regulator fined the legacy unit a record-high HK$400 million and suspended two of its licences for 12 months apiece. The fine was reduced from HK$605 million to HK$400 million. Lawyers said that the case bears significance for other banks and licensed entities, in that the regulator may use the number of complaints as a multiplier when determining the level of a fine going forward.

With the HKMA recently revealing that eight more AML cases are under investigation and that it aims to have said cases resolved before the Financial Action Task Force’s (FATF) on-site evaluation in 2018, and with the Singapore regulator becoming even more active on AML following the 1MDB debacle, 2018 promises to be an even more eventful year on the enforcements front. 18

INDUSTRY

The Final Word:

REGULATIONS AND COMPLIANCE This year, regulators in Hong Kong and Singapore have focused on suitability and AML, respectively. How have you responded to intensified scrutiny on both fronts? PV: As a management principle, we are committed to working in the best interests of our clients, always. We have a compliant and systematic approach to make sure that the products and services we offer remain appropriate to the profiles of our clients, and fully comply with all the regulations in the respective jurisdictions. MB: AML and suitability continue to be the two critical issues for the industry in Hong Kong and Singapore. My sense is that the industry has continued to make progress in both areas but â&#x20AC;&#x201C; as always - there remains work to be done to improve systems, embed recent changes and reinforce culture. WC: CMB Private Bank has always attached significant importance to regulatory compliance. To achieve regulatory compliance, we have taken various measures, including comprehensive investigation of the entire process of selling products, implementation of certified sales mechanisms, becoming the first private bank in China to do this. CMB is also one of the first batches of domestic banks to carry out AML work. On the basis of adhering to the relevant laws and regulation in China, CMB will [implement its] AML monitoring or customer risk rating systems with set monitoring standards or rating parameters corresponding to the high risk countries or regions prompted by FATF. DVD: One of our priorities for the private bank is to deliver on our conduct and financial crime risk programmes, and invest in enhancing our control environment. We are investing significantly in digitising our platforms and processes, which will enhance how we handle suitability and AML matters. For example, we are continuously enhancing our client due diligence engine. At the same time, our multi-year wealth management platform upgrade will further automate suitability checks. In parallel, we continuously review and enhance our standards and procedures, to ensure they meet regulatory expectations as well as the high standards of conduct we follow at the bank.

PM: Suitability and AML is not new to us at all as we have always had very strict rules around these matters, globally. As such that actually puts us in a very good position as we feel we are a leading institute with regards to these themes. In fact, our in-house system S2i has automated a large number of strongest suitability checks, to name just one example of how we deal with this. OYF: Singapore and Hong Kong are both key financial centres in Asia and it is important that we remain vigilant when it comes to client suitability and AML. For example, we have beefed up our firstline-of-defence and risk and compliance teams. We also ensure our relationship managers are trained regularly to anticipate AML issues and are well-equipped with up-to-date information, guidance and advice in this area. AL: We are always supportive of the governmentâ&#x20AC;&#x2122;s efforts to enhance the regulatory framework, maintain the competency of practitioners, and ensure an equal playing field for all. Regulatory change has also led to a new capital regime for banks with more complexity and transparency. It has greatly impacted the cost of doing business and requires us to focus more on advisory services for clients. At the same time, we believe it is a huge opportunity for those who believe in the value of doing the right business the right way, and have invested accordingly over the recent years. TSS: Rules surrounding tax reporting and AML have been tightened significantly and this may cause some short-term pain for the industry in terms of increased costs of compliance and surveillance, but it is better for all industry players in the long-term as standards are lifted across the board.

Do you expect MiFID II have a significant impact on your Asia business in 2018, and what are you doing to prepare for the regulation when it rolls out? LY: As a European bank branch operating in Asia, MiFID II is relevant. While the impact on business is likely to be relatively muted, there will be several other platform, operational and reporting requirements. Internally, several MiFID II work streams covering these regulations have been set up over the past years to monitor and review progress against these requirements, with active engagement of global stakeholders. PM: We have always believed that transparency is one of our key value propositions to our clients and as such, MiFID II will have limited impact on our Asian operations.

CH: MiFID II is a huge revolution for European banks, but here in Asia, we have been subject to much stricter regulations than those in Europe for many years now. Our bankers are all licensed, we have compulsory training, we have regulators that are extremely strict on suitability and money laundering. Therefore, I view MiFID II as a way of Europe catching up with the standards we have in place. We are of course looking at MiFID II because there are some marginal instances where we will have to take the regime into account. But for the bulk of our business, we are already way ahead of a lot of the reforms that are in MiFID II. 19

RESEARCH

2017 Structured Products Report: Regulatory challenges and technological opportunities

sian Private Banker explored Asia’s structured products market in 2017, with a particular focus on private banks in Hong Kong and Singapore. The basic source of primary data for the 2017 Structured Products Report was a 6-tier survey with 41 questions that addressed private banks in Hong Kong and Singapore. The data sample covered approximately 73.5% of the Asian market in terms of AUM and the questionnaire was distributed to 62 leaders Chart Total Banking across1:33Percentage private banks.ofInRMs’ addition to Private questionnaires, the research team conducted 24 semi-structured interviews, at three different Revenue in Asia Attributable to Structured Products stages, with representatives of private banking, investment banking as well as law and FinTech specialists.

Chart 1: Percentage of RMs’ Total Private Banking Revenue in Asia Attributable to Structured Products

Among a wide variety of payoff structures, fixed coupon notes have a share of 32.2%, followed by accumulators which account for 16.4% and ELNs/KO ELNs which account for 10.2%. Furthermore, in a relation to credit-linked structured products, investment grade bonds account for 72.5% of the market, down from 82.5% in 2013. Stabilisation of commodities, robust global economic growth and strong profitability of emerging market companies have been major driving forces behind increasing demand for emerging market bonds. In parallel, emerging market bonds denominated in local currencies have become increasingly attractive as a result of the US dollar drop which has increased the purchasing power of other currencies.

Chart 2: Percentage Breakdown of Structured Products by Underlying Assets

14% Commodity 0.9% Other 3.9% Credit 3.2% Interest Rate 3.3% Currency 18.4%

13%

12%

10%

Equity indices 5.4%

2016

2017

In 2017, 13.7% of private banks’ revenues were attributable to structured products, up from 12.6% in 2016. This can be attributed to the prolonged rise of stock markets as well as to the fact that market volatility and the 2015 battering of the financial markets led clients to take a more prudent approach opting for products, such as FCNs and autocallables that could help them hedge against risks.

Direct equities 64.9%

Source: Asian Private Banker

RESEARCH

Table 1: 2016, 2017 Maturity Buckets of Structured Products

Table 1: 2016, 2017 Maturity Buckets of Structured Products 2016 0-3 months

Percentage (%)

2017

Percentage (%)

37.5

0-3 months

39.0

3-6 months

18.8

3-6 months

18.1

6-12 months

30.2

6-12 months

27.1

1-2 years

10.1

1-2 years

8.8

2-3 years

2.2

2-3 years

4.9

In addition, approximately 85% of structured products have a maturity of less than a year, with the percentage of those with maturity between zero to three months being 37.5% in 2016 and 39% in 2017. The increase at the two ends of the maturity axis is the result of clientsâ&#x20AC;&#x2122; low risk appetite which results in higher demand for either short-dated products to avoid medium-term risk or for longer-term products to take advantage of the active management component and a diversified basket, through AMCs and fund-linked notes with maturities of three or more years. In 2017, private banks approved close to four new structures and

more than 3 years 1.2 Platforms more for thanStructured 3 years 2.1 Execution? Chart 3: Do You Use Online Product one new structured product provider each on average. The approval

process takes 4.4 months for new structures and 6.7 months for new providers.

Chart 3: Do You Use Online Platforms for Structured Product Execution?

Single-dealer platforms 57% YES 88%

Multi-dealer platforms 71% Phone/ e-pricers 96%

PB NO 12%

Phone/ e-pricers 100%

With respect to their distribution toolkit, it is common practice among private banks to initially use single-dealer and multi-dealer platforms and then conclude their transactions through e-pricers and telephone calls. Regarding regulatory issues, private banks expect that MiFID II and 871(M) will have a rather negative impact on their structured product business, but at the same time it can pave the way to new business opportunities. Looking ahead to 2018 and notwithstanding existing challenges, most of our contributors expressed their optimism about the prospects of the structured products markets in Hong Kong and Singapore. This survey was conducted independently by Asian Private Banker, but was made possible through the sponsorship of Vontobel and Citi. Sponsored by: Get full report: apb.news/spreport

INDUSTRY

Morgan Stanley’s PWM clients reap benefits of bank’s ‘early’ bullishness on China

hile Asia’s HNW investors were generally slow to participate in a global equity rally that has sustained throughout 2017, the same cannot be said for Morgan Stanley’s private clients who the bank says have benefited from its bullish China stance since the beginning of the year.

Nick Chan, Morgan Stanley

Unlike other houses that have now fallen in line with Morgan Stanley’s positive view towards the world’s second largest economy, Morgan Stanley has been pro-China since February, points out Nick Chan, co-head of sales for Private Wealth Management Asia, who warns against underestimating the strength of Morgan Stanley’s research capabilities.

“In terms of driving client decisions and giving them the confidence to get into the equities space, they know we are the number one franchise for the asset class,” Chan said. “We were the first to be extremely positive [on China]. Today it is a consensus call – but we were early in February and our clients followed us.” Indeed, China equities have enjoyed a stellar year, notwithstanding a recent sell off amid concerns over valuations and profit-taking. The MSCI China index was up a staggering 43.97% year-to-date as over 30 November, while the MSCI ACWI was up 20.70% over the same period.

Vivien Webb, Morgan Stanley

“As you know, we are getting towards the end of the fixed income cycle but a lot of our clients were extremely happy this year because they jumped into equities fairly early in the year,” said Vivien Webb, cohead of Sales for Private Wealth Management Asia, also citing the bank’s research prowess. “The quality of our research is a huge plus and a huge differentiating factor for us and our clients.”

Their comments come in the wake of Morgan Stanley’s 16th Annual Asia Pacific Summit in Singapore – a three-day event bringing together over 1,300 investors and 370 corporates, with the bank’s research chops on full display. Webb estimates that over the course of the event, the bank facilitated over 3,700 1-on-1 or small group meetings. In attendance was Mike Wilson, Morgan Stanley’s chief US equity strategist and CIO of the institutional securities & wealth management business, who told Asian Private Banker at the time that the US will be “the worst performer in global equities in the next 5 years as Europe and Japan can truly exit their QE programmes and there is more pent-up demand remaining from the financial crisis.”

James Gorman, Morgan Stanley

“We would love to expand our wealth business, whether organically or inorganically, as it is one of the businesses we’re strong at, but small in this part of the world,” Gorman added. Morgan Stanley PWM Asia currently ranks among the top ten private banks in the region by assets under management – although its head of the business, Vincent Chui, has consistently downplayed the significance of AUM rankings as a measure of business performance. “[I]n a very low interest rate environment and given that clients have little hesitation moving funds from one bank to another in pursuit of higher return or opportunities, I think the effectiveness of the AUM benchmark is diluted,” Chui told Asian Private Banker earlier in the year. Vincent Chui, Morgan Stanley

Also at the event was Morgan Stanley’s CEO, James Gorman, who underscored the importance of the bank’s private wealth management business in the region, telling media that though the bank has “never aspired to have a large business outside the United States in wealth management … it would be a mistake to keep that attitude.”

INDUSTRY

Even so, both Webb and Chan say that 2017 has brought significant traction for the firm’s PWM business, both in Greater China, where it is more dominant, and the region’s southeast. “With regards to greater China fund flows, the majority actually came from China and, as you have seen, the exuberance of the capital markets this year with so many IPOs,” said Webb. “This year our investment banking group again had very high market share in terms of the more interesting IPOs out of China. So naturally we in PWM were well positioned to benefit from this, in terms of attracting assets from the entrepreneurs of these newly listed businesses. So from the capital markets side, we definitely increased AUM from North Asia and China specifically.” Morgan Stanley’s Southeast Asia PWM business has also seen marked success this year, says Chan, who highlights the firm’s decision two years earlier to set up a Greater China desk in Singapore targeting Chinese entrepreneurs seeking access to Southeast Asia by using the city-state as a springboard. “From a percentage increase perspective, [growth in our Southeast Asia business has] been higher because it’s been from a lower base, but I think what’s really helped us is that across the region, every single country is up,” Chan said. “Not only are we seeing strong flows from Chinese clients booking out of Singapore but we have done extremely well in the Philippines where we are seeing large delegations of clients visiting our offices in Hong Kong and Singapore, as well our conferences and summits in Asia and beyond.” That buoyancy extends to the firm’s hiring in 2017, even if the talent market remains competitive. The firm, which sat out bidding wars in 2016, has added north of 20 frontliners in 2017 – a significant number for a private bank that is much smaller than some of its peers in terms of employee numbers, stress both Webb and Chan. “I think we have found that a lot of that exuberance from the past has left the job market; and in fact, just given how clear our strategy is in terms of really focusing on the UHNW space, and in particular

active business owners, that means that we are also very focused in terms of the type of talent we need to attract,” said Chan. “It goes both ways: for experienced private bankers looking to bring their clients to a private bank that is also a leading investment bank is extremely attractive.” Because Morgan Stanley targets relationship managers who are equally well-versed in investment products, the search for talent has not been easy, especially as the bank often finds itself in competition with Asia’s family offices, which are becoming more sophisticated in terms of their staffing requirements. Still, Webb says that she is focused on finding bankers who are the right fit for a firm that functions strictly on a collaborative basis. “When we look at a prospect, we ask if they can fit into our culture, which is key, because even if the banker is a big producer, if he or she doesn’t fit in, then it will not work,” she said. As a measure of the significance of Morgan Stanley Private Wealth Management’s Asia business to the bank in the region, Webb and Chan point out that for every dollar PWM generates – depending on the year – anywhere between 20 to 30 cents is generated in the other parts of the firm. “The fact that our approach is very collaborative across the firm means that for every dollar we produce, there are very big ancillary benefits to other divisions – that’s something we track and I don’t think many of our peers do,” said Chan. It is for this reason that Morgan Stanley’s conferences are pivotal for the firm, which clearly places a lot of pride in its ability to furnish bankers and clients with erudite market research. “The feedback we get from new hires – and the first thing they do is join one of our conferences in the region – is that they are unbelievably impressed,” added Webb. “Coming to a conference like this, our new joiners can feel the heartbeat and the collaborative culture of the firm – they are in a position to be able to go up to anyone and get connected so easily.”

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Noah’s Kenny Lam says firm is prioritising quality growth over volumes For Noah Holdings, 2017 was another pivotal year. The firm expanded its international footprint, established a global family office, and became the first Chinese independent wealth manager to be rated investment grade by S&P Global. At the same time, China’s domestic wealth management industry underwent fundamental changes as regulators sought to rein in the provision of implicit guarantees and establish a professional investor regime, among other important initiatives. Kenny Lam, group president of Noah Holdings, speaks to Asian Private Banker about the firm’s performance in 2017 and the outlook for the business and industry in 2018. Kenny, let’s kick things off by looking at Noah’s performance in 2017 and, specifically, what the results tell us about the trajectory of the business. Whilst we maintained strong growth in 2017, it was also a year that we learnt from mistakes as well as successes Kenny Lam and started building a higher quality business as opposed to one that relies on ‘brute force’ volumesdriven growth. So if you look at our results this year, they are really emblematic of where we want to take the firm. First, the quality of the earnings has improved markedly. We saw a significant increase in recurring revenues and greater diversification in terms of products distributed, which is an important milestone – not only for Noah, but for any serious wealth management firm in China, where there has traditionally been a ‘natural’ demand for fixed income products and less so for private equity which is more a long-term play. More specifically, fixed income products as a percentage total products distributed declined substantially – from 71% to around 40% in one quarter – while recurring revenue jumped. So the quality of revenue is so much higher now, which means that our client relationships are that much more sustainable.

Is this drop due to a downturn in client demand or due to efforts on behalf of Noah increase product diversification? This is the result of a very conscious effort on our behalf: we limited the supply of fixed income products to the frontline and we decided that there needs to be a much higher bar for the quality of fixed income products distributed. We also changed our training programme for the frontline so that the top bankers, in order to qualify for our private banker programme, must demonstrate that they can allocate effectively with greater allocation into equity products. 24

The second point worth noting about our results is that our asset management arm, Gopher, has brought on a lot of lieutenants to work alongside William Ma [Gopher CIO]. AUM has jumped 25% and revenue is also up substantially. The idea for us is to not only to further develop our sales platform but to have the ability to influence and be actively involved across the entire value chain. Finally, our third business arm, [internet financing platform] EJ Wealth Management, saw revenues jump by 120%. We recently released an app that can now perform four or five major functions. For example around 35% of all of our transactions are done end-toend through this app, which represents quite a substantial jump – and don’t forget, most of our clients are HNWIs.

In terms of the app, and considering the industry-wide drive for the greater adoption of asset allocation, does it allow for portfolio monitoring and rebalancing? Yes, clients can use it for post-investment reporting and dynamic asset allocation. I think what’s important to note here is that this [asset allocation] function is not solely driven by AI but rather underpinned by research generated by our teams, which we use to deliver targeted reports for our clients.

And are you seeing tangible evidence that clients are more willing to adopt an asset allocation strategy? We are seeing two things. First, an acceptance of our view that they should allocate more both to equities and the secondary market. Second, greater acceptance that they should globalise more. For example, our Hong Kong AUM has increased by around 25%.

Let’s take a step back and look at the current state of China’s domestic wealth management industry, including where it has come from and where it is going in your eyes. The way we see the industry is this. In the last two or three years, the

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general approach taken by wealth managers has been to capture as much market share and mindshare as possible. For Noah, then, we have focused on growing the frontline, volumes, and productivity in the safest possible way. We went from about 500 RMs to about 1,100 in three years. It was rough, but the market was a blue ocean at the time – if you look at the penetration rate of HNWIs using private wealth managers, it was probably around 15-18% versus about 55-57% in the US. Regulators started to recognise that there cannot be quality growth across all players. They introduced strong regulations around KYC, risk profiling etc. As a result, we are seeing some market consolidation, with players being much more careful about what products they put out. Moreover, regulators are no longer permitting any kind of implicit guarantee on a product. Even so, a number of our competitors continue to provide guarantees. What we do is help our clients understand that whenever they purchase a product, they are taking on risk.

The challenge for the industry then, is that it will no longer be able to pursue growth through volume. You said earlier Noah is pursuing a better “quality” of growth – so what specifically is your strategy? Noah’s management recently conducted a major strategic session to discuss how we should pursue growth in 2018 and beyond. Some of the regional CEOs told me they were slightly unsure as to how we should grow [in 2018] – because you cannot just grow another 25%. You cannot just push the sales team to sell more. The frontline wouldn’t feel comfortable with this and neither would our clients. So we focused on three important themes. First, technology. We recently hired a chief technology officer who was the first chief engineer for a leading payment platform in the United States as well as the CTO for one of the largest retail e-commerce sites in China. He will drive two things for us: the use of client information, particularly around how we develop a greater understanding of our clients; and the development of our online platform. The idea is to raise our transaction volume through the app to about 50-60%, which will help us better understand client behaviour. Second, globalisation. We initially expanded into Hong Kong as a testing ground. Hong Kong now has around 100 staff and accounts for about 10% of the group’s business. Then we expanded to Taiwan, which is around 20% the size of Hong Kong. This year, we moved quickly into the United States, Canada, and Australia because many of our clients have links between these countries. We just recruited a large real estate team for our east coast presence in the US, where we also cover hedge funds. Now in the US we are now doing mortgages, insurance, wealth management, real estate and VC/PE. Vancouver and Melbourne have servicing teams.

What’s your plan for Canada and Australia? I was recently in Vancouver and clients were telling me that they have a lot of cash sitting in bank deposits, but they would feel more comfortable investing in USD strategies through us as well as back into China. It’s worth noting that some of these individuals feel ‘left

out’ from the China growth story and so they want access [to the Chinese market] via Gopher. This sense of being ‘left out’ is something I had not anticipated.

In your eyes, is this flow back to China a relatively recent phenomenon? We’ve always talked about China going global but this is something that’s completely new. We are being approached, not only by HNWIs, but also institutions such as endowment funds in the US that are trying to up their exposure to China but are unsure as to who to go with.

Europe would appear to be glaring omission here. London is an important location for us to deploy an investment team. The reason why is that the asset classes differ from those in the US (e.g. distressed, credit). As far as other locations, we are considering Singapore. Singapore is fairly unique for private banking because regulations are relatively industry-friendly. Clients like Singapore because it is not part of China and want to park assets there for broader exposure.

How does your recently-established Global Family Office (GFO) service interact with these strategic offshore centres? We are now in the process of creating a Family Office Alliance. What we found when we built the GFO is that a lot of clients don’t want to give you US$5-10 million and be done with it. They want to meet other families that have similar levels of wealth and needs and that want to discuss issues around estate planning, trust structuring, and wealth transition in a private setting. We already have around 80 families that want to sign up for the alliance.

And third strategic theme Noah identified? The third theme is professionalism and, specifically, upping the degree of professionalism. We have been in fast growth mode in terms of volumes, but we want to make sure that future growth occurs with the correct allocations. Before, if you invested in credit products, it was just in home credit. Now, we are encouraging clients to invest in combination products which will minimise the risk. We are also pursuing quality growth by increasing the professionalism of RMs. We will be more stringent in terms of RM selection and training to make sure we stay ahead of prescribed standards.

I understand that Noah is stepping up lending going forward. Yes, we will begin lending in 2018. This will increase the quality of our client relationships, which were previously product-driven. The idea behind nurturing a quality relationship is about making sure that you understand liquidity needs and how to use allocation as a tool. So the lending aspect is something we have never touched. We are now doing about RMB 5 billion in lending and we expect to raise this to RMB 20 billion this year – 90% of which will be onshore. The remainder will be in Hong Kong where we just received our lending licence. We do around US$20 billion of new AUA per year. If we want to expand this, it’s not just about encouraging clients to buy more products but rather providing clients with some liquidity.

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The Final Word:

BUSINESS PERFORMANCE For some, asset gathering in 2017 was all about adding to the frontline via key hires, while for others, the focus was on increasing RM productivity and keeping RM numbers capped. Where did you sit on this spectrum? LY: Given the potential in Asia, wealth management business is considered the growth pillar of Deutsche Bank. 50 out of the 100 client-facing global hires will be based in Asia. We are not in a rush to hire as we are only looking for professionals who are dedicated to the industry and are keen to join our growth journey. To best serve and protect our clients’ interest, we have to build an ecosystem that includes client coverage, products, operations, investments, legal, compliance, technology, etc hence we are not only hiring RMs. We have already got more than 50 new hires on board in Hong Kong, Singapore and Dubai across different functions and responsibilities. It’s not just only about asset gathering. We would like to have a quality team which can help clients to protect and grow their wealth. MB: We have seen good growth in the business in 2017, with both new hires and the existing team contributing to this success. We do not set hiring targets or caps; rather, our approach is to work with like-minded RMs who share our vision and commitment to long-term client relationships—we will hire when we believe that we have found a good fit. DVD: We have been focused on building a strong team of senior bankers who can identify and support the diverse needs of our clients through market cycles, and we brought in around 60 new frontline colleagues globally this year. We have also put a strong focus on providing them with digital tools and development opportunities. We partnered with Thomson Reuters to launch ADVICE 2.0, an industry-first digital advisory tool for our RMs. This tool provides a “one-window” access to our actionable conviction lists across equities, bonds, funds, FX and derivative structured products, as well as the latest news and commentaries. This means that RMs can provide actionable investment advice that is pulled from multiple sources to their clients within minutes. We are committed to investing in our people and to giving them regular opportunities to upgrade their skills. We have a new industryleading private banking academy, in partnership with Fitch and INSEAD, both experts in financial education, to make sure all our people are equipped to adapt within the fast evolving private banking industry. PM: 2017 was a turning point for us at Indosuez Wealth Management. We took the opportunity of the competitive dynamics this year by acquiring CIC’s private banking operations in Asia.

Because of our similar cultures and commitment to client service and product excellence, CIC was the natural fit for Indosuez Wealth Management. We will combine our talents and capabilities to strengthen our regional set-up and increase our geographic footprint. Our complementary product offerings will enable CIC clients to benefit from a Hong Kong booking centre and indeed multi-booking centres globally. In addition, they will benefit from our discretionary portfolio management (DPM), advisory mandates, private equity, wealth structuring and corporate solutions capabilities. On our side, we will be implementing a 24- hour FX desk to service our clients. The combined resources of the enlarged Indosuez Wealth Management branches in Asia will ensure that our clients receive the personalised service they expect together with the most competitive products, tailored solutions and pricing models. OYF: UOB has made significant investments in its private banking capabilities in our people, platform and products over the last three years. As a result, the productivity of our relationship managers has doubled since 2014. We have doubled the number of employees managing the private wealth of our clients. As we have done so, we have remained selective in who we hire, choosing candidates that share the time-tested values of prudence, enterprise and innovation that the bank has been built upon. As our CEO has said previously, UOB is a bank that focuses on building long-term relationships and on balancing growth with stability. When I am looking for potential candidates I always have this top-of-mind as I assess not only their technical capabilities but also their mindset and values. Within UOB we also have a process to identify talents from the other parts of the bank and have training and development programmes established to help groom them for a role in private banking. At the same time, we continue to invest in better technology, products and processes to support our private banking relationship managers so that they become more productive. For example, we have embarked on a three-year digital transformation programme to enhance our client engagement infrastructure through digitalisation. For our clients, this means having access to personalised and up-to-date information at their fingertips which they can use to make investment decisions with their relationship managers. AL: Our focus has always been on building a strong team and equipping our people with the tools to give our clients the best. 27

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With our scale and commitment, we have built one of the largest and highest-caliber multi-lingual wealth management teams in the region, and have maintained a proven track record in terms of client advisor productivity. Our number of client advisors has remained fairly consistent over the years, but our invested assets have grown by CHF 127 billion since 2013. We constantly seek to equip our client advisors with the best tools to serve our clients, and digitalisation is a key part of our strategy that we invest in. We recently launched a digital hub in Hong Kong, the latest addition to UBS’s digital centres around the world, for clients and prospects to engage, network, and share knowledge with tech startups and experts. We also rolled out a new operating platform in Hong Kong and Singapore last year.

CH: We are a specialised bank and it is important to retain one’s characteristics, such as maintaining a high quality of service through a personal approach. We need to keep numbers somewhat limited and the important thing is to remain faithful to what we are. Two key concepts for Pictet are performance - that is portfolio or investment performance - and quality of service. Accordingly, we choose to grow our number of RMs very selectively and we focus on increasing our share of wallet. When we have happy clients, they give us more money and they introduce friends. In 2017, performance of portfolios was extremely good, even compared to benchmarks, and we have maintained the quality of our service because of the size we are. In terms of hiring in 2018, we have strategic targets - China, Indonesia and Southeast Asia in general - but in reality, you hire the good talent that comes your way on an opportunistic basis.

Many private banks in Asia are dedicating senior resources to the UHNW segment. But when markets turn and risk appetite diminishes, will this heightened focus on the upper tier (given that ROAs are generally lower) prove sustainable? PV: The finance industry will always be influenced by different economic cycles. Our UHNW segment focus has been in place for years as a growth driver for AUM and profitability and we have been able to weather the storm. As a reference bank for tycoons we have a long history in helping them manage their family wealth and we shall continue to build on that. As mentioned above, we have a dedicated structure and offering in place for our UHNW clients; providing relevant services and engaging in pertinent dialogues with these prominent families through our Key Client Group remains a priority for us. RL: Our business focuses on the UHNW segment and the client relationship is often built over many years through market cycles. We help clients navigate different market conditions and as more of them are embracing advisory services, this has mitigated the impact of market volatility on their portfolios and our business as well. WC: Our client base is the most important asset to us, and the services we delivered aim at fostering long-term relationships with our clients. Our family office offers many high-end client exclusive services, including family trusts, tax planning, legal consulting, corporate finance and offshore financial services. Based on professional experience in serving HNWIs and remarkable understanding of their family demands, we unveiled the family office service for the HNWIs in August 2012. This kind of service provides integrated management for HNWIs families’ financial assets and debts by customising unique wealth planning solutions, including maintenance and appreciation of wealth, risk isolation and asset allocation. In 2013,

CMB developed a further service—wealth inheritance family office— to provide customised wealth protection and inheritance plans for high-net-wealth families and integrated financial solutions such as family trusts, wealth inheritance, tax planning, legal consulting and insurance planning for clients. TSS: As wealth management is an integral part to our overall business, we will continue to pursue our growth strategy and expand our footprint. Last year, we obtained a licence to run a new wealth management office in London to serve UHNW clients and family offices who are looking to Asia for an edge in both their business and investment needs. Our expansion into UK makes us an attractive option for clients who are looking at Asia as an investment destination, coupled with our in-depth bank-wide expertise, and heritage and reputation as Asia’s safest bank. We have also been working to take our private banking business to the next level with a strong focus on the UHNW segment. For example, we have been working with a number of UHNW families on direct private equity investment opportunities that are seeking strategic as well as financial investors. We have also been showing private equity investment opportunities brought to us by our UHNW clients who are seeking partners. Finally, we have been working collaboratively with our corporate and investment banking partners to bring one-bank holistic solutions to help UHNW business owners manage the entire spectrum of their wealth, to minimise their liquidity and exposure concentration risks.

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DISCRETIONARY PORTFOLIO MANAGEMENT LEADERS CONVERSATION 2018 A closed door morning with heads of DPM from the leading private banks

10 April, Singapore | 12 April, Hong Kong www.apb.news/dpmlc2018

This event qualifies for CPT/CPD accreditation.

Conversation Partner:

RSVP to Vanessa Ng vanessa.n@asianprivatebanker.com / +852 2529 1276

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Vontobel WM’s CIO: Three factors that will keep a lid on inflation APB Mandate recently spoke to Lars Kalbreier, Vontobel Wealth Management’s CIO, on among other things the inflation outlook. His message: “Inflation is likely to remain subdued for longer than what many would expect.” Why? Kalbreier cites three key factors: price transparency, employees’ lack of aggressiveness around wage increases and input costs in the context of shale gas. Kalbreier shares his thoughts below. Inflation is likely to remain subdued for longer than what many would expect “Lots of economists are scratching their heads not understanding why inflation is so low at this stage of the cycle. The two biggest factors for the market are: interest rates – which clearly are related to inflation – and global economic growth. Had inflation normalised, interest rates would be higher than they are now, and central banks would have had to act. As of now, they haven’t. With regards to global economic growth – this is, of course correlated – if you have low interest rates, you plant the seed for higher economic growth. But right now what we have is a period where, despite good economic growth, we have low inflation and hence low interest rates.”

This view hinges on three key factors “Economists tend to apply very long-dated economic models. But what economists have yet to factor in is technological progress. What do I mean by that? There are three factors to consider: First, the unprecedented price transparency for all goods, which has been enabled by technology. Second, there is a lack of aggressiveness on the side of employees when asking for wage increases. Third, input costs and, specifically, what is happening with shale gas. Combined, these three factors are fairly new phenomena and not in the ‘traditional’ inflation models of central bankers and economists. At this stage of the cycle you should see more inflation, central banks would be more aggressive, they would be concerned about being behind the curve and the environment would not be as benign as it is right now for risk assets.”

On pricing transparency “On the point that new technology has enabled a level of price transparency never seen before in history, think about smartphones. The first iPhone was only launched in 2007 with mass-adoption 30

Lars Kalbreier, Vontobel occurring around 2011/2012. What we’ve had since is the launch of price comparison websites that have been greatly enabled by smartphones. These cover not only hotels and flights but also consumer goods – recently we witnessed, for example, Amazon getting into fresh foods when they bought Wholefoods. So you have a huge pricing pressure on producers because of price transparency driven by this technology. A consumer may visit a bricks and mortar shop to try on a pair of shoes and then check her phone to compare prices. If the premium that she needs to pay the shop is equivalent to the satisfaction of being able to get the shoes right away, she will pay the premium, but if it is too high, she would rather wait one day to get it delivered at home. In other words, the pricing power has moved from the producer to the consumer.”

On the lack of aggression around wage increases “The second factor concerns labour costs. Usually, in the US, if you have unemployment rates at less than 4.5%, you would expect substantial wage increases. It hasn’t happened. Why? First, studies looking at the financial crisis in 1929 showed that even when the economy had improved afterwards, those who were

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affected and who lost their jobs or were scared to losing a job were less aggressive when asking for wage increases. That’s exactly what’s happening right now. The crisis left some scars on employees. Prior to the GFC, many people thought their jobs were relatively safe and could switch from one employer to another – and then the rules were rewritten overnight. This trend is also driven by advances in technology. Quite a lot of jobs are being threatened by technology – if you think about truck drivers in the US, when they read headlines about experiments with driverless trucks, they will possibly think twice when going to their boss to ask for a wage increase. This is one core reason why unit labour costs and wage pressures haven’t really picked up as strongly as economists would have predicted at this stage of the cycle.”

On shale gas and input prices “Third, consider input prices in the context of shale gas, which is a fairly new technology. The interesting thing with shale gas is that it is easy to switch on and off. That means that most break-even rates for shale gas producers in the US are around US$50-55 dollars. If prices go above this, it takes one or two months to produce again. This prevents strong appreciation in oil prices despite strong global demand. Therefore, as a producer, you can’t ask a strong premium on your input costs because that upwards volatility in oil prices is not as high as it used to be. Combined, these three factors explain why inflation is confounding all economists for the time being. That’s critical for monetary policy and central banks. The economy at present is firing on all cylinders. At the beginning, it was led by the US, but now, it is also led by Europe which was growing stronger than the US during the year’s first two quarters, EM, Japan and, of course, Asia. We have seen this synchronised growth for roughly 18 months. In fact, if I look at earnings, global earnings were flat from 2012 to 2015 and we even had a global earnings recession in 2016. It’s only 2017 that we saw a strong pickup in global earnings growth and we expect this to sustain through 2018. But in spite of this pickup in the global economy, it wasn’t really inflationary and hence central banks could keep looser monetary policy longer than what would have traditionally happened.” So what does this say about asset classes going forward, particularly here in Asia where the hunt for yield persists despite a global equities rally?

On Equities “This is an interesting point. I would be inclined as a former analyst to say: ‘markets have been extremely strong for 18 months now and it’s probably time to take profits.’ Having said that, what we don’t have is exuberance. We do not see an extreme bullishness in retail customers which would usually signal the end of the bull market. More importantly, if I look at valuations, if you take forward P/E ratios, and you look at where we are in different regions, if I look at the average valuation range bottom and peak compared when with the 25 year average, we are slightly above in the

US which has yet to peaked. That’s why we are slightly underweight in the US. But if you look at EM, eurozone and Japan, in each case we are either right on the average valuation or we are slightly below. So despite the rally we have seen, and since earnings have grown also, markets (except the US which is expensive) are not cheap but they are not expensive either. For that reason, as long as we have this backdrop of global economic growth, unthreatening inflation and accommodating monetary policy, that speaks to a full position in equities. We are underweight US, overweight Europe and overweight Japan. Volatility, which is at extremely low levels, should statistically be higher than it is now. I expect it to rise in the second half of 2018. The reason for this is that central banks will start to slowly implement a more restrictive policy which will increase volatility. Therefore, the fantastic returns we had this year are unlikely to occur next year. Equity returns will probably be more likely in single-digits – in the EM space, about 9% and 7% in DM.”

On fixed income “On the appetite for fixed income assets, the interesting thing here is that if I look at predictable revenues – German bunds for instance – we don’t have any [bunds] in the portfolio. The reason for this is that if you look at 10-year bunds versus the inflation rate, the real yield is negative. That is partly a result of an extremely loose monetary policy and the ECB’s bond purchasing. This tells me that financial repression is in full swing. If I take a 10-year German government bond and I keep it until maturity, then my real value after inflation is going to be lss than EUR 90 – resulting in a loss of more than 10%. This brings me to other fixed income areas which are more attractive, like EM fixed income and especially India, where you get a strong yield pickup for an improving credit quality. So yes, there is a still an appetite – and we have an appetite – for predictable and cash flows, but having said that, what is really critical is that because yields are so low in many developed markets, you need to look at real yields and real yields are often negative. Therefore, one needs to look at less obvious places than the traditional government bond market.”

On alternatives “Let’s put it like this: within PE, I’d be very cautious. What we are seeing right now are very strong institutional flows going into the sector – also from pension funds that have never done PE in the past. The deals we have seen, or the multiples that have been paid, are really back to what we saw in 2007. We also see that there has been quite a lot of leverage in these deals. Therefore we are very cautious towards PE. With regards to hedge funds: if we look at merger arbitrage/eventdriven or long-short equity, we think there are good risk-adjusted returns to be caught for two reasons. First, because of the stronger and more synchronised global activity, we also see a pickup in mergers. Second, for long-short equity, if you look at the last two years, we didn’t see too much dispersion between stocks and sectors. That has changed this year where we have seen a lot of sector rotation and the dispersion of stocks in sectors.” 31

TECHNOLOGY

PBs using MiFID II-compliant digitools to reduce suitability stress

rivate banks scrambling to adapt their compliance workflows to suitability requirements set by Hong Kong regulators are turning to tech tools originally designed to address the European Union’s incoming Markets in Financial Instruments Directive II (MiFID II). Many industry players are drawing similarities between the Securities and Futures Commission’s (SFC) suitability requirements and the new proposal to strengthen suitability requirements under MiFID II. This has made MiFID II-compliant solutions popular among the region’s private banks, according to Pascal Wengi, the APAC managing director of digital banking solution provider, CREALOGIX. “For both regulations, the client and the banker are required to carry out certain workflows such as ascertaining risk appetite through comprehensive questionnaires, periodic reviews and creating client proposals,” Wengi explains. “Therefore, our MiFID II compliant solution fits well with private banks’ current suitability requirements. This year, the request we have received from Hong Kong-based private banks seem to be mostly on the topic of suitability.” Wengi said that CREALOGIX introduced its new tool Digital Advisory Workbench (DAW) to 15 banks, including private banks, and “half were looking at the functionality of the suitability engine”. In June, the Hong Kong watchdog enforced a client suitability clause to ensure that if an institution “solicits the sale of or recommends any financial product” to a client, “the financial product must be reasonably suitable…”. As a result, private banks are tightening their client suitability processes – from the way a client’s risk and product profiles are matched to documentation of alternative product proposals – in the event of inspection. Meanwhile, in July, the European Securities and Markets Authority (ESMA) drafted a set of guidelines on new suitability requirements within the MiFID framework. ESMA said that there are a number of areas where suitability needs to be fortified, including risk assessment through carefully procured questionnaires, automated advice such as robo advisors, assessing the concentration of risk and the proposal of alternative products. The regulator is currently sieving through industry feedback and is due to push out a findings statement in 2018.

Pascal Wengi

“For both regulations, the client and the banker are required to carry out certain workflows such as ascertaining risk appetite through comprehensive questionnaires, periodic reviews and creating client proposals. Therefore, our MiFID II compliant solution fits well with private banks’ current suitability requirements.” Several other tech vendors and tech integration advisors have made similar observations when approached by Asian Private Banker, but have declined to speak on-the-record.

Suitably stressed Similar to Wengi, George Ong, CEO of Hong Kong-based Axisoft, has seen a surge in demand for its investment suitability tool, Compass in 2017. “Where I believe private banks in Hong Kong are still in a grey area is in the way their RMs manage product and client risk ratings,” he said. Given the sheer amount of information that an RM needs to collect from a client – 2,500 fields to be exact – Ong believes it makes more sense to use a digital tool that has an exhaustive rule engine. His firm’s investment tool leverages artificial intelligence technology to provide RMs with a rules engine that can help them sift through client data and product risk profiles quickly.

INDUSTRY

The Final Word:

TECHNOLOGY What are your priorities for 2018 in terms of digitising your offering and upgrading your technology? LY: The bank will invest EUR65 million globally in client-focused technology and to upgrade client-related systems. In 2018, we will continue our effort in upgrading our client experience with us. We will further fine tune our trading platform for structured products and digitise our client onboarding process. PV: Our global client experience (CX) program, where the APAC launch took place in Singapore [in 2017], is a testament to our digital transformation commitment and enhanced service delivery to our clients. Ten applications have been developed globally of which five were conceived in Asia. These new digital solutions will enable our relationship managers to deliver products and services by offering a seamless user-experience across multiple channels. We shall continue to further invest into digital development and strengthen our overall capabilities to cater to increasingly demanding client needs. RL: We will continue to invest in technology to enhance the client experience. [In 2017], we introduced a revamped client web which allows clients to view and analyse their portfolios more easily. We have also streamlined processes to reduce account opening time. WC: CMB Private Banking prioritises the research, development and upgrade of the IT system to consolidate working processes and risk management, and uses advanced methods to realise scientific wealth allocation.

Firstly, to match the â&#x20AC;&#x153;1+Nâ&#x20AC;? service mode, CMB Private Banking has launched GAAS (Global Asset Allocation System) for HNW clients in China to promote quantitative wealth management instead of traditional empirical approaches. Secondly, CMB Private Banking is the first in China to offer a global hotline service to provide an instant wealth management service for its top-tier clients. Clients can call their private banker from any location to complete transaction demands. CMB has launched electronic contracts to replace traditional paper contracts so as to enhance efficiency and reduce carbon footprint. Clients can sign e-contracts online to invest in financial instruments via internet banking or other mobile terminals. E-contracts provide clients with a better experience and accelerate product sales. DVD: We are investing in our core banking platform and upgrading technology to improve the quality and breadth of our client service, to be able to capture the significant opportunities in our footprint. In an age of information overload, clients want convenient access to relevant market insights. We launched market views on-the-go [in 2017], a capability that makes our market insights available via mobile and online banking channels in more than 12 markets. We are digitising our platforms at speed across advisory, price discovery and order management. We now have an enhanced derivatives pricing platform which allows RMs to provide clients almost real-time pricing for equity derivatives, allowing clients to execute trades faster.

The Final Word:

BUZZWORDS What word best describes or captures 2017 in terms of Asian private banking?

Incredible markets

Resilience A race to RM productivity Serendipitous

Opportunity

Seizing the day

Growth

Rejuvenation (and Trump)

INDUSTRY We want to make it easier for our clients to work with us and we are focused on automation and a reduction of the paperwork they need to do. For instance, we have automated our derivatives confirmation process, which saves significant time and effort for our clients. Our ongoing wealth transformation programme continues to deliver a series of enhancements [and] productivity improvements through process automation over the next few years. [In 2017], we launched an enhanced performance reporting and portfolio view tool, which will make it much faster for RMs to update their clients on their portfolios. In 2018, we plan to continue to invest in technology to meet the evolving needs of our clients. PM: Indosuez Wealth Management is proud to continue to use and support our own IT software suite, S2i, that is owned and operated by the Credit Agricole Group. S2i operates on a fully shared platform. Any upgrades or enhancements requested by one of our clients benefit the entire community of clients – this is one of the key principles that underlines its business model. S2i covers both front office and back office needs and is utilised by support functions; finance division and risk management and compliance. It also complies with various local regulations and taxation requirements in ten countries across the world . AL: Digitalisation is central to our client offering, and we have several enhancements planned for 2018 which we will announce in due course. Our clients have told us that they want more customised views and ideas delivered digitally, and we are listening to what they say to provide digital solutions that are best-in-class and tailored to their needs. CH: When you are a pure-play private bank, you have to be the best in your area. So we have been investing large amounts in technology over

the years. We have continually upgraded our existing communication service with clients called “Pictet Connect” and we received multiple awards for having the best internet-based service for clients. We are now upgrading this significantly, and you will hear more in 2018 about the roll-out of a wealth management application for clients that provides a greater amount of information, portfolio analysis, research, investment simulations and risk analysis. We are going full steam ahead to stay in front of the competition, just as we have been in the past. TSS: For us - it’s always been about being customer-focused, journeyfocused, data-driven and agile. So, in terms of customer journeys – UX and UI designs are keys to digital success. We look at their journey from beginning to end, and apply human-centred design to develop relevant solutions. Even for our employees, we focus on how digital tools can help them do their jobs better and faster. For example, we have rolled out RM mobility tools which are iPads with intuitive applications that pull all relevant customer information and portfolio recommendations for bankers to use in each client meeting that is synced with their diaries. This not only saves them time but also makes their recommendations timely and relevant. Because wealth managers are in the unique space to provide advice to their customers, they are also in the unique role where they can define how technology can evolve to better serve private clients. This means greater collaborations with fintechs to identity and tap into new technologies to scale solutions that deliver better results for customers. For example, with the recent launch of our open API platform which is one of the largest in the world today it will boost DBS’ lead in creating innovative and customer-centric experiences by making available a wide array of APIs for other retailers, service providers and software developers to plug into. It enables us to connect with ecosystem partners to embed ourselves into their journeys, and in that way, deeper embed ourselves in the lives of our customers.

What will be 2018’s buzzword?

Unimaginable Agility

TRUMP

Optimism

Rise of Asia

Where will US and Europe take us? A digital future

Change

Digitisation, data, democratisation and domestication

INDUSTRY

IAM & FAMILY OFFICES LEADERS CONVERSATION 2018 Brings together the key leadership of the increasingly significant and important IAM community

12 June, Singapore | 14 June, Hong Kong www.apb.news/iflc2018

This event qualifies for CPT/CPD accreditation.

Conversation Partner:

RSVP to Vanessa Ng vanessa.n@asianprivatebanker.com / +852 2529 1276

A P B M A N DAT E

Factor-based investing: Complement or threat to hedge funds?

A Jean-Louis Nakamura Lombard Odier

lthough the industry broadly agrees that factor-based investing strategies, as an allocation in portfolios, bring value, some players have gone as far as to say that smart beta and alternative risk premia strategies can replace hedge funds altogether.

One major proponent of factor-based investing is Lombard Odier, which applies it using a top-down process for its discretionary mandates; and testament of the strength of its conviction in the approach, Swiss pure play decided to eliminate all hedge fund positions one year ago. “A very significant portion of our risk-based portfolios is made up of smart beta products, and we took the bold decision one year ago to replace all of our hedge fund positions with alternative risk premia UCITS funds,” said Jean-Louis Nakamura, CIO for Asia Pacific and CEO Lombard Odier Hong Kong, highlighting additional benefits the approach brings including greater transparency (about factor exposures), liquidity and, to a lesser extent, fees. For investors that wish to access such strategies outside of discretionary mandates and through mutual funds, first generation UCITS funds were admittedly underwhelming as they attempted to replicate the aggregated performance of underlying indices which often involves significant tracking error.

“The evidence is clear that factor investing is getting closer to the tipping point of mass adoption in many markets, although in Asia Pacific it is still primarily practiced by the more sophisticated early adopters”

Pacific it is still primarily practiced by the more sophisticated early adopters,” said Stephen Quance, APAC director of factor-based investing at Invesco. But elsewhere, and particularly at larger wealth managers, traditional hedge funds are expected to continue to play a meaningful role that complement factor-based investing strategies. Gunther Jost, APAC co-head of hedge funds at UBS Wealth Management, agrees, highlighting that top hedge funds continue to deliver value-added performance. “I think if someone has a portfolio of fundamental-oriented hedge fund managers, for example on the long/short side, it’s a good complement if you add a manager who invests based on a model or algorithm with a systematic approach,” Jost said.

Nakamura notes, however, that second generation UCITS products launched in the past four years are proving to be “much more promising” as they attempt to mirror single hedge fund strategies instead of an aggregate index.

“The key is obviously that the manager needs to be equipped technically and from a resources standpoint to develop and maintain all those models, which is why some of the bigger firms in the quant space have been more successful.”

“This is because a significant part of hedge funds’ returns stem from elementary strategies, which can be replicated at a lower cost,” he said.

Despite limited interest in recent years, hedge funds have seen a resurgence in Asia of late. Major wealth managers are making headway, particularly by securing allocations and providing relatively limited access to top hedge funds to regional HNWIs.

According to Invesco’s Global Factor Investing Study, overall factor allocations increased from 12% to 14% amongst repeat survey respondents over the past year, “The evidence is clear that factor investing is getting closer to the tipping point of mass adoption in many markets, although in Asia

After five consecutive quarters of outflows (from 4Q15 to 4Q16), 2017 has proven to be a strong year for hedge funds. According to the latest Preqin report, 3Q17 year-to-date global inflows reached US$43.9 billion, boosting total assets by 7.4% to US$3.5 trillion. 37

INDUSTRY

INVESTMENT ADVISORY SUMMIT 2018 Join over 800 senior leaders from the Asian wealth management industry

15 May, Hong Kong | 17 May, Singapore www.apb.news/ias2018

This event qualifies for CPT/CPD accreditation. Lead Partner

Conversation Partners

RSVP to Koye Sun koye.s@asianprivatebanker.com / +852 2529 0617 Networking Partner