Issue 104 October 2016 Lite

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OCTOBER 2016

Issue 104

ASIAN PRIVATE BANKER Independent, Authoritative, Indispensable

I N S U R A N C E

B L O O M Exclusive results from industry-first HNW life insurance study P12

BORIS COLLARDI

Julius Baer’s CEO on recent M&A activity: “We said we are not going to spend one minute on this” P8

INSID E

Deutsche’s Campelli: “There is no reason why we shouldn’t be in the Top Five”

APB Mandate: Perception problems impede hedge fund growth

Technology: Three ways private banks can implement blockchain

Echo Chamber: The month’s most notable quotes

P5

P24

P20

P4

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CONTENTS ISSUE 104

October 2016

CEO Andrew Shale Editor-in-Chief Shruti Advani Editor Sebastian Enberg Editorial Richard Otsuki Priyanka Boghani Managing Director Paris Shepherd Design Simon Kay Production DG3

Operations Benjamin Yang Koye Sun Jessie Cheng Joanne Tse Business Development Madhuri Chatterjee Sonia Lam Sam Chan Stacey Wong Olaide Ogungbesan Digital Tristan Watkins Yiyang Zhou

4

Echo Chamber The month’s most notable quotes

5

Editorial The Scoop: Achtung Deutsche?

8

Industry Straight Talk: Boris Collardi, CEO, Julius Baer

12

Insurance Insurance Bloom: Exclusive results from industry-first HNW life insurance study

20

Technology Three ways private banks can implement blockchain

24

APB Mandate Perception problems impede hedge fund growth

28

Industry Funds Selections Nexus 2016 photos

30

People Moves Movers & Shakers

ISSN NO. 2076-5320

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

+852 2529 5577 +852 3013 9984 info@asianprivatebanker.com

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E C H O C HA M B E R

“[The] nexus between transnational threats, the inherent risks faced

by Singapore as one of the world’s largest financial centres, and vulnerabilities within the system is not sufficiently reflected in Singapore’s NRA [National Risk Assessment].”

Financial Action Task Force report

“We have a strong bench of senior managers and these changes will enable new talent to take over and lead the next phase in our growth story.”

Deutsche Wealth Management commenting on the exit of Ravi Raju and the appointment of Lok Yim as its new APAC head.

“Fund houses do a great job knocking on doors and introducing new products. But what about the existing products on the platform? Help us with those.”

Gatekeeper speaking at Asian Private Banker’s annual Funds Selection Nexus in Hong Kong “Falcon [Private] Bank has demonstrated a persistent and severe lack of understanding of MAS’ AML requirements and expectations.”

Monetary Authority of Singapore instructs the Swiss bank to cease operations in Singapore.

The revocation of Falcon’s merchant bank licence in Singapore “will not impact the strategic impact of the bank.”

Falcon Private Bank responds.

“It’s time to take off your virtual reality glasses, strip the fintech hyperbole away and really identify where fintechs can add value.”

Hong Kong-based private banking COO

“Launching Crestone was ‘no easy feat’”.

Michael Chisholm, CEO, Crestone Wealth Management

“Unfortunately, it has become more difficult to construct such products because the terms are no longer in favour.”

Rex Lo, BEA Union’s managing director of business development, speaking on fixed maturity bond funds.

“Recently, some [authorised institutions] may have applied stringent customer due diligence measures that are disproportionate to the likely risk level of the customers.”

Norman Chan, chief executive, HKMA

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EDI TORI AL

Achtung Deutsche?

T

hose of you kind enough to read this column on a regular basis know it is entrenched in news and views on Asian private banking. So if you are disappointed that this month’s column is yet another commentary on Deutsche Bank at a time when its position in the headlines of every financial publication is virtually guaranteed, be patient. We are not jumping on that bandwagon.

Instead, I’d like to share excerpts of a conversation with Fabrizio Campelli (FC), global head of wealth management at the bank and – in his final sit-down interview – Ravi Raju (RR), Deutsche’s erstwhile APAC head of wealth management, that is focused on the bank’s plans for its wealth management franchise in Asia.

Again, those who read this column on a regular basis will know that I believe scepticism about whether the bank will exist in a year or not is an overreaction (perhaps in this case, hedge funds are not the smartest ones on the block?). As to whether the bank will continue to have a wealth management franchise in Asia or not, read on...

SA: You’ve reiterated that you would like Deutsche to be one of the world’s top five wealth managers. The bank first committed to this as a strategic objective in 2012, and it subsequently lost its spot among the top ten wealth managers.

Some would argue the environment is more dire now than it was then, so how do you intend to lead the bank into the top five slot?

FC: I really believe there is no reason why we shouldn’t be in the top five but I will not put us under any time pressure to do so. If it takes us less than two or three years, I would be surprised; if it takes us over a decade, I would be disappointed.

First, a fair amount of investment will have to be made to transform the business. We want the operating model to be simpler, we want a future-ready technology platform and we want to build a

world-class product platform. There is no silver bullet that will get us there.

SA: When you say that you want a simpler operating model, are you referring to the decision to shut down certain booking centres?

FC: The cost of being subscale is prohibitively high for anyone in the industry and certainly for us. Hence the game changer for our business will be [built] around reducing our global footprint – closing down certain booking centres where we have not achieved optimum size – and building deeper competencies at key booking centres.

SA: Will that strategy send mixed messages to both clients and potential recruits regarding your commitment to wealth management?

FC: We are a global wealth manager and we don’t want to give that position up but we need to be efficient about which products we offer to which clients and in which geography.

Tightening geographies and our product offering is part of streamlining the operating model. Both clients and potential recruits appreciate this, I don’t think either are unduly worried.

Fabrizio Campelli Deutsche Bank

SA: I want to talk about the investments required to build a world class tech platform in

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EDI TORI AL

a bit, but first let’s talk some more about your product platform. If you pare it down, what will be your raison d’être as a private bank?

FC: Historically, Deutsche Bank has been a very strong name in product [engineering]. In fact we have never shied away from doing things that other banks perhaps found too complicated, including committing our balance sheet. We absolutely do not want to change that. This is important for not just clients to know but also for the people who work for us.

One of the reasons we have been so successful in this region [Deutsche Bank Wealth Management ranks 8th in Asian Private Banker’s League Tables with US$66 billion in AUM as of end-2015) is because we are committed to staying relevant when it comes to sophisticated product.

SA: Even with balance sheet and commitment, manufacturing sophisticated product is getting increasingly difficult because of the new regulations.

RR: You say that but I don’t think regulation will stop product innovation. Four years ago, the HKMA put in place client suitability norms that the industry felt were too retail oriented and prescriptive. Everyone thought that would be the end of product innovation, but professional investors continued to demand sophisticated product and that kept product innovation on an impressive trajectory. What becomes very important is client suitability.

SA: Let’s talk about your plans to invest in technology.

FC: Investing in technology is probably the most important part of our transfor-

will remain committed to wealth management. This [HNW strategy] is the way to sustainably grow the wealth management franchise over the next few years and move away from the cycles the industry is subject to.

In Asia we will continue to focus on and invest in UHNW. But we also want to exploit the macroeconomic trend of growing HNW wealth and build a presence in that segment. That will help smooth out some of the volatility associated with the UHNW segment. However, we will make the investment in phases. We will focus on fewer geographies – Hong Kong and Singapore to begin with. The idea is to build a team of RMs over the next five years by Ravi Raju adding 25 per year. Should the model live up to the expectations we have [of it], then we can add scale by rolling it out in China. mation agenda. I am referring to non-essential, enhancement tech spend. We SA: You sound convinced of the bank’s used to allocate €20-30 million per year commitment to both wealth management in the past and we are moving to €60-70 and Asia. million per year just for wealth management. In addition, we will spend €700FC: Every decision the bank has made in 800 million on technology that can disthis challenging environment has been rupt the business model. consistent with its commitment to wealth management. This should not be surprisSA: The focus on technology should lend ing given the top manager [John Cryan, itself nicely to your HNW ambitions in CEO, Deutsche Bank] comes from UBS Asia, something Ravi has spoken about which is built around its wealth managebefore. ment business. He is aware of the business’ importance and is absolutely comRR: In the ten months since he assumed mitted to it. this role, Fabrizio has been able to get the Whilst some of our peers have been bank’s board to approve the HNW plan. giving mixed signals about their commitWe have had to invest in our platform and ment to Asia, our management team has commit to a multi-year strategy. Getting a remained stable because we have continmanagement board to commit to both of ued to put our money into the region. these in the current environment is quite an achievement.

The bottom line is Deutsche Bank needs wealth management if it is to build a great FC: Deutsche Bank is looking at a greatbusiness. er diversification of its earnings. Hence, it

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I NDU STRY

Straight Talk: Boris Collardi, CEO, Julius Baer With Boris Collardi at the helm, Julius Baer has effectively doubled its client assets under management to CHF311.4 billion (2016Q2) and orchestrated what many believe to be one of the most successful private banking acquisitions in recent times. In Asia, where the bank ranks fifth by AUM, Julius Baer has added over 100 RMs since the beginning of the year, leading some to question whether its bottomline can hold out amidst these difficult market conditions. Over green tea and espresso, Collardi tells Asian Private Banker that he remains focused on growth, although current M&A opportunities do little to tempt him.

Boris, a headline story this year is how Julius Baer has been hiring aggressively in Asia, but how much change is too much change?

As you know, after a while, a team that had led the firm from inception to where it is today in Asia needed to be refreshed – and that is what we effected in the past year. We brought in new people with additional skill sets and new networks. It’s a people business, so after a while you exhaust your own network of people. We wanted fresh energy and new perspectives on market strategies, and if you look at Asia within the firm, the region continues to develop along exactly the same line but with more focus.

We recently passed the mark of US$300 billion in assets under management and Asia now accounts for 20-25% of this total.

How patient are you willing to be with Asia because this asset acquisition phase will need to be backed up with profit?

The good news for us is that the years where investment was more important than revenues are now behind us.

We are profitable now in Asia and have been for the last few years and, indeed, Asia is starting to contribute significantly to the bottom line.

Obviously part of the incremental profit growth we are having in Asia has been reinvested in new or future growth, but I’m sure we can agree that you need to put your money into people that can produce returns for you and not spend on people who cannot. So the incremental revenue potential in Asia is greater than in many of the other regions where we run the business.

But you’re right: we need to balance this in a very careful way.

Now we are using profit in Asia to fund the next wave in investments.

Break down your investments.

These investments are not only in people. Yes, we’ve hired over 100 RMs this year – that’s over 30% capacity for us. But we’ve also invested in other functions – we’ve opened many new accounts in the last few months so you need people to open and follow through; we’ve invested in premises and have taken additional floor space in Hong Kong and Singapore; we’re investing in technology – we should be by the first half/second quarter next year up-and-running with our new global platform which is being developed in Asia and Asia will be the first region to come onstream.

Even so there have been a number of cases of late where Julius Baer has hired bankers that in all likelihood would have struggled to go elsewhere and/or who had fairly small books.

This is our eleventh season of hiring bankers in Asia. We’ve had mixed successes – some batches have been extremely successful.

Our Asian asset base was initially built by around 100 individuals who joined us mainly from one competitor. I can assure that these bankers brought 85-90% of their books with them and not 1015%. Think of the Merrill transaction in Asia: it has been a merger of equals. We already have the same pool of assets in 6-7 years in Asia that Merrill had after over 30 years in the market.

For many, that integration set the benchmark for the industry and, arguably, it has defined your career too.

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IN DUST RY

We didn’t even want to spend one minute on it because we knew the people and we knew the moment their CEO would resign, he would take others with him.

Yes, but it also spoils us because now everything else we are looking at seems less optimal. We’re pursuing a growth strategy, not because we like it, but simply because, in our industry, if you don’t scale in an intelligent way, you’re not going to be around in the next 100 years. We have a big legacy we need to defend and protect.

But the industry is changing. On the revenue side, we have less opportunities because everything is becoming increasingly regulated, while the cost and complexity of running a business is higher. So how do you compete in this environment? By increasing scale. If you look at Julius Baer’s first half-year results, we made over CHF400 million in net profit. When I joined the group we used to make CHF100+ million in one year.

So, as of now, organic growth trumps M&A?

Organic growth is a less risky way to grow than doing M&A. Imagine for one second if we had acquired another private bank

with recent regulatory issues, I suspect we would be in a totally different discussion today. So you need to pick what deals you do. Organic growth is slower, but it gives you more opportunities to adjust your risk-return profile.

There have been lots of opportunities this year simply because the whole industry is in disruption, so people are fed up and don’t want to spend another two years explaining to their clients that their company will

be around or not.

M&A has become a little less enthusiastic simply because what I see in the market does not fulfill our criteria. Obviously we need to be present and even if we don’t want to look at something, there are a lot of people that will approach us and roll us into the process.

Take one recently-acquired institution in Asia. We didn’t even want to spend one minute on it because we knew the people and we knew the moment their CEO would resign, he would take others with him. So that’s why we said we are not going to spend one minute on this.

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I NDU STRY

You’re waiting for that ‘right’ deal?

I don’t know if you’ve ever been on a safari? When you’re on a safari and you’re sitting on the jeep early in the morning and you’re trying to spot that beautiful animal. An hour passes, two hours pass, and you say, “maybe no luck”, and then the next day you go again. That’s how M&A is – you need to be extremely patient.

That one opportunity for us, I’m convinced, will exist again. I don’t think Merrill was a once in a lifetime deal. It was a good deal – we got a lot of criticism for the transaction initially – but there could and will be something else. I just don’t know when.

The important thing for us is not to do the wrong transaction because this occupies capacity. It can destroy our reputation because you’re only as good as the last deal you’ve done.

Compared to many of your peers, you seem almost tentative towards China’s onshore prospects, at least in the short-medium term.

You bought a strong wealth management business in India, but it is built around an individual who continues to stay with your platform. Are you worried that business is vulnerable?

You need to be a bit paranoid. You need to think of the unthinkable on daily basis. Having said that, I’m very comfortable with our India onshore franchise. I wouldn’t say it depends on one individual. India was the last location to move over from the Merrill transaction and, despite that, there were basically no losses of clients or personnel. In the private banking context, this is quite rare.

It’s true, we ask our team in India now, post-transition phase, how do we go about growing this business? It will be very interesting to see what will happen, because many of the international players have exited [India onshore].

When you’re on a safari and you’re sitting on the jeep early in the morning and you’re trying to spot that beautiful animal. An hour passes, two hours pass, and you say, “maybe no luck”, and then the next day you go again.

That’s how M&A is.

I did my first business trip to China in 1998. At that time the discussion was already “How do we tackle the Chinese market?”. Since then China has created a huge amount of wealth, but most of that has been captured in HK and Singapore from a wealth management point of view. So the first pillar of our China strategy is to remain in Hong Kong and Singapore and to capture that market and the assets of those who domicile here. Second, I remain prudent about entering China onshore simply because the regulatory framework – which while normal for a developing financial market – is today not yet there where it should be for running a wealth management operation. Because of licensing issues, the barrier to entry remains high and, frankly, when you arrive there you’re like a mosquito. The local players have an advantage – how many times have we seen wealth management boutiques in China without even a single licence? Of course, we still want to create brand visibility in China. So we’re partnering with local firms and we’re developing asset management products for Chinese companies to distribute in China but with international asset allocation.

So are you committed to India for the long-term? Will that business be up for sale in a couple of years?

This is one of the businesses where, for BoA internally, there were a large number of discussions because the local team wanted to keep it. At some stage, the discussion came up regarding regulatory approval and what would happen if we did not get it.

We [Julius Baer] said that we see India onshore as an integral part of how we are going to run our business, because we have a successful NRI business and there is a convergence between India onshore and the NRI business. So we see five ways we can leverage this business: (i) India onshore for Indian onshore clients; (ii) NRI business for NRI clients; (iii) NRI clients that want to invest back onshore; (iv) onshore clients that can legally export capital internationally; (v) finally, Indian solutions for non-Indian residents.

At what point do you expect Asia – what you refer to as your “second home market” – to contribute the lion’s share to your global AUM? Hopefully before we are retired. It’s reasonable to expect that the next mark will be 30% in the next 5-10 years.

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I NSU R A N C E

Insurance Bloom: Exclusive results from industryfirst HNW life insurance study

A

t the end of 2015, the top 20 private banks in Asia by assets under management 80% accounted for US$1.47 trillion in high net worth wealth, according to Asian Private Banker data.

The region is widely pinpointed as the global wealth management ‘hotspot’ – and for good reason.

By 2020, research suggests that Asia – which is already home to the world’s largest high net worth (HNW) population – could be home to more than US$14.5 trillion in HNW wealth. China alone will account for over 50% of this total, according to Julius Baer.

At the same time, the region is undergoing a massive transfer of wealth from the first to second generation, coinciding with what is commonly referred to as the ‘largest wealth transfer in

In your assessment, will the 'traditional' model of private banks partnering with brokers remain relevant in the near future?

YES

62% 1–3 years

6% Immediately

57%

20%

43%

In-house broker

Direct

NO

If you answered what kinds of models do you foresee taking hold?

history’. Asia’s ultra high net worth segment is expected to pass on upwards of US$1 trillion to a younger generation.

Further contributing to an uptick in wealth management and insurance product sales through private banks in the region is the persistent uncertainty and volatility of markets.

How long has it taken for you to be able to trust your broker with your clients and their universal life insurance needs?

16% 4–6 years

4%

4%

More than 6 years

I do not trust my broker

8% Not applicable

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INSURAN CE

Indeed, Asia’s traditionally transaction-heavy private banking clients are sitting out the volatility to the detriment of bank revenues (globally, transaction-based income fell 24% year-on-year in 2016Q2, according to a recent UBS report), while the uptake into discretionary mandates in the region remains slow.

Combined, these conditions spell opportunity for those operating in the wealth planning space. Against a backdrop of economic uncertainty, muted client activity, compressed private banking margins and an aging wealth pool, momentum is increasing in the insurance solutions space; and there is a growing sense that insurance is now a credible pillar of a HNW portfolio. Indeed, a number of private banks tell Asian Private Banker that they are targeting a relationship manager penetration rate for converted insurance referrals in the realm of 50%.

Challenges remain, however.

Asian Private Banker, in partnership with Transamerica Life (Bermuda) Ltd., has conducted the industry’s first ever HNW life Insurance survey – and the results are revealing.

A total of 455 private banking and wealth management practitioners representing 29 private banks, institutions with private banking facilities and wealth management firms in Hong Kong and Singapore completed the survey, and the results are revealing.

Here, Asian Private Banker teases out the key trends to emerge from the inaugural Exploring the HNW Life Insurance Landscape Report 2016.

Generally speaking, who do clients prefer to communicate with regarding their life insurance needs?

10%

73% Relationship manager/ private bank

14%

Broker

3%

Insurance provider

0%

Not sure

Other

In what areas could your broker improve their service?

Improve relevance/value of product offering | 18% Improve response times to client/RM questions | 16% Increase end-client brand marketing/awareness | 9%

Increase training and education for relationship managers

34%

Provide better incentives to referring RMs | 9% Simplify product offering and documentation | 14%

Pricing 9%

30%

RM impetus/ education

Leverage 15%

36%

Client estate/ legacy planning/ health needs

From your experience, what are the most significant factors that stimulate the growth of life insurance business at a private bank?

Market environment 9%

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I NSU R A N C E Compliance/ prohibitive company policies 11%

From your experience, what are the most significant factors that inhibit the growth of life insurance business at a private bank?

RM unincentivised 6%

28%

37%

Lack of client or RM understanding

Unsuitable product terms/ pricing

Poor reputation for insurance/ insurance companies 9%

Poor client servicing 4% Lack of company support/resources 4%

Investment diversification 9%

19%

What are the primary conversation topics that help to encourage end clients to consider a universal life policy?

29%

Estate and inheritance planning

Succession planning/ transfer

Retirement 8% Access to additional leverage 6% Health 10%

Liquidity planning/ access 10%

Tax planning/ management 10%

What trigger events are most likely to lead to a conversation with your clients about considering a life insurance policy?

Childbirth or succession planning

65%

Discussions about additional leverage/liquidity needs | 29% Family dealth or serious medical issues | 50% Marriage/divorce within the family | 27% New client being on-boarded | 13% Recent purchase of other products from your firm/bank | 8% Significant business ownership changes | 31% Significant change in client’s underlying business assets | 25% Significant investment portfolio changes | 8% Other | 2%

1. Train me, please!

The current regulatory framework dictates that relationship managers cannot directly recommend or sell a product, but must instead refer clients to a broker (typically external) who then proposes a specific solution. Moreover, few expect the current provider-broker-banker model to change in any material way going forward.

RMs dominate client face-time and, notwithstanding regulatory limitations that shape RM-client interactions, clients are ultimately exposed to: (i) the RM’s awareness/knowledge of insurance solutions and (ii) the RM’s mandate to refer to a broker.

Those private banks that refer insurance product in Asia maintain an average of just under four broker relationships per institution.

However, respondents indicate that it takes an average of 1-3 years for an RM to ‘trust’ a broker with her client(s), and because clients prefer to communicate their RM when it comes to insurance-related needs, it seems clear that private bankers typically emphasise one ‘tried and true’ broker relationship over all others.

Overall, Asia’s RMs are moderately satisfied (6.7 out of 10) with how brokers service their clients.

But while a select few insurance brokerage firms were singled out for their high and personal level of service and strength in follow-up, RMs are dissatisfied with brokers on a number of fronts.

Beyond all else, wealth planners and RMs want their brokers to provide further training and education.

This finding supports an earlier poll run by Asian Private Banker, where RMs indicated that they require more detailed product knowledge in order to refer more clients for a life insurance policy.

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What is the age breakdown of clients that you have referred to a broker to discuss universal life policies?

43%

are 30–50 years old

35%

are 51–60 years old

15%

of respondents who have never referred to a broker for Universal Life

9%

are under 30 years old

3%

are above 70 years old

63% Likely

29%

11%

are 61–70 years old

How likely are you to refer a client to a broker about considering a universal life insurance product?

6%

Extremely likely

2%

Unlikely

Extremely unlikely

Do you expect rising interest rates to have a significant impact on your clients’ wealth management decisions, particularly in terms of premium financing?

31%

YES

NO

4%

NOT SURE

65%

For private banks, training and education (or the lack thereof ) could have a significant impact on the business.

Indeed, 30% of respondents said that an RM’s education on insurance solutions is a key driver of life insurance business at private banks – second only to a client’s own needs (36%) – while a further 28% indicated that a deficit in a client or RM’s understanding of insurance is likely to have a detrimental effect on business.

2. The evolving face of HNW insurance clients

Those HNWIs who are more likely seek out an insurance-related solution via a private bank tend to fall into the moderate-moderately conservative risk tolerance category, and while a client’s risk profile is, of course, specific to the individual and is driven by an amalgam of factors, there is (at least, theoretically) a positive correlation between risk aversion and age. This would suggest that those clients with significant life responsibilities (e.g. family, business) prone to purchase HNW life insurance.

Little surprise then that RMs cite succession and inheritance planning as key trigger topics to encourage clients to consider taking on a life insurance. Similarly, respondents report that childbirth, succession and medical issues are the most potent trigger events.

Even so, private bankers report that the age breakdown of clients purchasing life insurance policies is trending downwards.

Currently, 80% of private banking clients that are

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INSURAN CE

referred for a HNW life insurance policy (primarily universal life) are aged from 30-60 years old and the majority (43%) are 30-50 years of age. And it’s this ‘younger’ segment that is expected to drive policy sales going forward.

Whereas most respondents (46%) expect HNW insurance (universal life) sales will remain stable among clients aged 50 and above, 31-50 year olds are “more likely” (40%) to purchase a policy today.

So what are the essential differences between traditional HNWIs and the so-called new generation in the wealth planning context?

Respondents point out that the traditional or older HNW segment remains focused on retirement and legacy planning and primarily relies on insurance as a protection mechanism.

The younger generation of HNWIs, while increasingly receptive to life insurance solutions, view insurance as a wealth creation tool and focus on liquidity and return.

Results suggest that this new generation is also more likely to conduct its own due diligence on specific products and is particularly sensitive to pricing.

3. Will UL reign supreme?

To the best of your knowledge, what is the breakdown in the size of life insurance policy coverage among your clients?

% of clients that have below US$10 million coverage policies % of clients that have US$10–30 million coverage policies % of clients that have US$30–50 million coverage policies % of clients that have over US$50 million coverage policies

minimum

1st quartile

0%

20%

0%

0%

25%

11%

0% 4% 5%

2nd quartile mean

50% 52%

29%

20%

3rd quartile

maximum

84%

100%

50%

89%

60%

30%

Among your end-clients who have purchased or are considering to purchase a universal life policy, for what percentage is private bank-originated premium financing a key part of their decision-making process?

78%

NO

YES

premium financing is an important deciding factor

22%

premium financing is not an important deciding factor

It is not much of a stretch to say that universal life (UL) structures dominate Asia’s HNW insurance market. In

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I NSU R A N C E

the past 12 months, around nine new HNW insurance providers have entered the space in Asia – and most offer UL. But while the overall penetration rate for UL and other HNW life insurance policies remains low, relationship managers indicate that they are more likely than not to refer a client to a broker for a UL policy. However, the conversion rate for referrals is considerably lower.

Currently, 42% of RMs say that just 5-10% of their clients actually hold a UL policy, and the majority of these clients hold policies with coverage below US$10 million. Close discussions

with a number of wealth planners reveal that private banks aim to boost the sales conversion rate to upwards of 20% in the near-term.

Of course, the low interest rate environment has done little to dampen demand for UL – a sentiment echoed by many wealth planners who point to the importance of premium financing when it comes to client’s decision to purchase a policy.

Even so, the survey results show that current market uncertainties can both increase and decrease life insurance policy sales, suggesting that other factors (pricing, personal circumstances) play a more significant role than structural factors.

To the best of your knowledge, what effect does market uncertainty have on the buying behaviour of your private banking clients when purchasing life insurance policies?

Purchases increase with market uncertainty

38%

Purchases decrease with market uncertainty | 25% No change | 6% No correlation | 25% Do not know | 6%

Compliance/ prohibitive company policies 11%

From your experience, what are the most significant factors that inhibit the growth of life insurance business at a private bank?

37%

Unsuitable product terms/ pricing Poor client servicing 4% Lack of company support/resources 4%

RM unincentivised 6%

28%

Lack of client or RM understanding Poor reputation for insurance/ insurance companies 9%

4. Innovation

So what lies ahead in terms of product and will UL structures continue to dominate the HNW life insurance space in Asia?

According to one wealth planning head at a European private bank in Hong Kong, heightened expectations that central banks will hike rates will likely lead to further diversification in the insurance product mix among HNWIs in Asia. Still, the demand for UL is expected to persist and increase. 56% of respondents believe that UL solutions will increase in popularity over the next 24 months, but just 26% see a rise in the popularity of whole of life insurance.

Perhaps indicative of the continuing dominance of UL in Asia, more respondents, when asked what other insurance product ideas are worth exploring, said that the universal life structure remains “the best option”. Only 5% and 3% said the same about joint life and whole life, respectively.

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T E CH N O LO GY

What use is blockchain to a private bank?

Blockchain is yet to enter the everyday vernacular of private banking COOs but few would argue that it has no place in a rapidly changing industry. Asian Private Banker speaks to experts in the field to ascertain the immediate and future applicability of a technology that, until now, has been synonymous with bitcoin.

W

hen the mysterious Satoshi Nakamoto introduced bitcoin to the world in 2008, many predicted that the cryptocurrency would lead to the disintermediation of banks by enabling individuals to carry out electronic payments directly between themselves.

Eight years on, and the jury remains out on the impact bitcoin will have on the financial industry.

Even so, blockchain – the technology bitcoin leverages – is piquing a fair amount of interest from an unlikely corner of the financial industry in an unlikely part of the world: private banks in Asia.

Many would question why a legitimate financial institution would want anything to do with a technology that is designed to circumvent it.

Perhaps even more surprising is the attention blockchain is receiving from COOs and CTOs in Asia – a region generally regarded as third-in-line behind the US and UK when it comes to the adoption of new technology.

The reason why, experts tell Asian Private Banker, is that blockchain and private banking both place a premium on trust.

Consider for one moment the opening lines of a recent UBS whitepaper on blockchain: “Imagine a world where everyone was

perfectly honest and trustworthy when it came it money”. Sounds awfully like a private bank’s marketing slogan, doesn’t it?

Indeed, the private banking industry has built its value proposition around the importance of human contact and trust. And blockchain – unlike other disruptive technologies that threaten to do away with the ‘human touch’ – could potentially slot into private banks’ middle offices to further fortify the client-bank relationship.

Block-what?

The peer-to-peer distributed ledger essentially provides an autonomous but reliable accounting record. The ledger (which can be public or private) is maintained by a network of computers that requires no central authority or third party intermediary. Nodes on this decentralised network continuously and sequentially record transactions on a ‘block’, creating a unique ‘chain’. Fundamentally, each ‘block’ contains a ‘hash’ of the previous code preventing recording duplications of the same transaction. Furthermore, the technology employs a raft of sophisticated cryptographic techniques and clever incentives to ensure that users can authenticate identities, all the while protecting their privacy.

What’s left is a database of immutable time-stamped

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TECHN OLOGY

information for every transaction that is replicated on servers across the globe.

Blockchain, therefore, has the potential to expedite certain banking processes and, ultimately, rein in expenses. “(The) adoption of new business models leveraging technology like blockchain to increase operational efficiencies and reduce costs while maintaining client data security will become integral to how banks will operate in the future,” says Manoj Bhojwani, head of IT Asia Pacific at Credit Suisse Private Banking.

Former group chief information officer at UBS Wealth Management, Oliver Bussmann agrees, pointing out that though the technology is receiving more attention on the institutional side, private banks could soon catch on.

“Blockchain has the potential to simplify banking processes … [and could] affect private banks going forward, particularly with pension funds,” he says.

Similarly, another Hong Kong-based group head of IT, who prefered not to be named, tells Asian Private Banker that, in the near future, blockchain could replace two of the bank’s internal databases and that the success of its application will “come down to internal group level coordination”.

So how could private banks leverage blockchain technology?

1. Pension funds

2. Smart Contracts

Manoj Bhojwani Credit Suisse Private Banking

(The) adoption of new business models leveraging technology like blockchain to increase operational efficiencies and reduce costs while maintaining client data security will become integral to how banks will operate in the future.

For Bussmann, blockchain could significantly improve the pension payment system at private banks by quickening settlements.

The technology could expedite the long-winded process of clearing and settlements and make it easier for banks to keep track of their investors. Till now, experts in the field had touted the asset management industry to be the first to take on the technology.

Swaps that will automatically execute trades – or smart contracts – present another opportunity for blockchain, which could reduce the need for intermediaries and thereby reduce spreads, says Bhojwani.

“Financial institutions can potentially benefit from a more streamlined, efficient and cost-effective securities issuing and servicing process,” he explains.

“These programmable stocks, bonds and other instruments live on the chain. As autonomous agents, they can pay their own coupons and dividends, self-register their owners, carry out their own reporting etc. This would bring down the cost of securities issuance and servicing.”

Because smart contracts are easily programmable, Bhojwani believes it is possible to create more customised securities tailored to individual investors at lower costs.

Earlier this year, 25 of the world’s leading lenders, including J.P. Morgan, HSBC, Citi, Mizuho Bank, UniCredit and Nordea, joined a global consortium led by financial tech firm R3 to explore the benefits of blockchain. The platform will focus on smart contracts technology and its application to bonds.

3. Shared KYC utility

With private banks under more scrutiny than ever when it comes to KYC and AML, many believe that blockchain will be crucial to enhancing the rigour of client onboarding processes.

“Whenever a shared KYC utility project is brought up, private banks are quick to raise concerns about data privacy and client consent,” says the Hong Kong-based group head of IT. “But this is where blockchain technology can help. A distributed ledger to comply with KYC regulations could reduce errors and create a record of all checks carried out for each client.”

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In June this year, Benedicte Nolens, head of risk and strategy at the Securities and Futures Commission, said that blockchain could be used to increase compliance with KYC regulations.

Not all private banking tech experts see it this way, however, and many believe that it may be naive to position blockchain as a potential silver bullet for KYC and AML shortcomings.

“It’s a scale game: without high transaction volumes, blockchain technology becomes expensive and therefore counterproductive,” says one Asia COO at a Swiss private bank, speaking with Asian Private Banker.

He does add, however, that a distributed ledger that records every transaction in a securities market could get very big very quickly, “potentially overwhelming systems”, and that the still-green technology should be trialed at retail banks where volumes are higher.

Sudhir Nemali, Deutsche Bank Wealth Management’s Asia Pacific COO, agrees that private banks will not be early adopters but does not rule out the technology’s application in the future.

It’s just that “blockchain technology does not have immediate applicability in private banks just yet,” Nemali explains.

According to a recent survey of 20 Asia-based private banking COOs conducted by Asian Private Banker, 15 said that they believe blockchain has no functional place at private banks today.

However, more than half indicated that they are optimistic about the technology’s prospects, with 65% saying that blockchain will go mainstream within the next 3-5 years.

As we speak, fintechs are racing to discover implementable solutions using blockchain and, given the speed Sudhir Nemali of innovation in the burgeonDeutsche Bank Wealth Management ing financial technology space, few would be game enough to discount blockchain’s potential.

“This technology is very exciting and it is right and proper that people should try to build viable businesses around it,” concludes Bhojwani.

“It makes sense for all involved to collaborate to build on the basic foundations of this new world.”

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A P B M A N DAT E

Perception problems impede hedge fund flows

The performance-chasing conundrum

For many Asian HNWIs, performance-chasing is once more the play du jour, setting a difficult scene for private banks that are looking to stimulate client appetite for hedge funds.

Indeed, gatekeepers and family offices attending Asian Private Banker’s recent Funds Selection Nexus (FSN) in Hong Kong and Singapore indicated that the appetite for liquid alternatives is a weak 4.7 out of 10, with 40% citing poor recent performance as the primary hurdle to sales.

In 2015, the HFRI Fund Weighted Composite Index – a hedge fund benchmark – registered -1.1% performance (versus Barclays Global Aggregate Bond Index’s -0.5%).

2016 has not been all that different.

Although the hedge fund index has managed +4.19% (versus the bond index’s steady +5.75%) this year, it has done so in choppy conditions, having kicked off at -0.6% in first quarter and a pedestrian +1.8% second quarter.

For proponents of the performance-chasing, buy-high approach, the case against hedge funds is not difficult to grasp.

Given a foggy outlook for both global earnings and political devel-

opments in the West, the lower-for-longer rates environment is, predictably, better suited to fixed income. “[A] lot of household names have been underperforming and have had a difficult period over the last 12 months,” says Johann Santer, head of fund specialists, Hong Kong at Julius Baer.

But despite poor recent performance, Santer stresses that such data should not drive flows.

“No one has a crystal ball to predict how the market will move, so the return of a diversified portfolio is what matters and should be the overall objective of the client.”

Similar to other asset classes, private banks are actively grappling with a shift in investor mindset, from product-driven to solutions-driven.

This is especially true for hedge fund investors that have long been chasing names and track records and not using

managers as instruments to construct diversified, objective-driven portfolios.

Indeed, 37% of respondents to Asian Private Banker’s FSN poll cited a lack of investor sophistication as a primary hurdle to hedge funds investing among Asian HNWIs. “We continue to see many investors allocate to hedge funds and liquid alternatives based on strong prior performance without a good understanding of the complexities of the strategies they invest in,” comments Michael Thompson, head of global wealth management, Asia ex-Japan and head of Singapore at PIMCO. “As more investors become aware of the benefits of liquid alternatives and hedge funds, this is the next ‘knowledge gap’ that must be addressed – ensuring that clients understand the strategies in which they invest.”

Product misperception

But even when clients are not unduly fixated on recent performance, they are

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A P B M AN DAT E

guilty of harbouring skewed perceptions towards hedge funds.

“We have been seeing demand for both liquid and illiquid alternatives strategies in Europe for quite some time now – but Asia hasn’t caught on as fast,” notes Nicolas Kopitsis, head of intermediary distribution, Asia ex-Japan at BNY Mellon Investment Management.

“Although clients in the region still want to achieve double-digit returns – a very difficult goal if you are relying on just long-only [instruments] – there is still pushback, especially with regards to the usage of derivatives. Many investors still have bad memories from counter party risks during the Lehman crisis.

There is a lot of education that is still required to close the gap.”

The emergence of liquid alternative UCITS funds has certainly helped to resolve such issues.

“Because they are organised like mutual funds, liquid alternatives provide investors with access to sophisticated hedge fund-like strategies whilst allowing the flexibility of daily liquidity,” says

Edward Moon, an executive director and hedge fund specialist at Bank of Singapore’s managed investments unit.

“Funds that operate and comply within a defined regulatory framework such as UCITS offer additional features such as greater transparency in their investment strategy and portfolio, limits on concentration risk, limits on leverage and other requirements that unregulated investment products are not required to follow.”

“In general, we notice a trend towards liquid alternatives over traditional hedge funds since clients tend to feel more comfortable with the transparency and more noticeable liquidity provided in such structures,” Julius Baer’s Santer adds.

At the other end of the spectrum are those investors who have had positive experiences and are largely indiscriminate towards UCITS and illiquid offshore structures.

This presents its own set of dangers – especially for those hedge fund investors who made hay when the HFRI Index delivered 10% annualised returns between 1990 and early 2016.

“Casino time” is how one gatekeeper at a local wealth manager describes the perception that many of these Asian UHNWs hold towards hedge funds.

“Many investors just can’t see it’s in the name.

It’s called a hedge fund because it’s supposed to hedge things. People are getting twisted ideas about [these products] in part because every time you read headlines about hedge fund managers, they’ve either lost a billion dollars or bought themselves a private jet.”

Beyond streaky performance-chasing, investing in one or just a few hedge fund managers poses a concentration risk to portfolios. To the industry’s credit, some private banks have toyed with the idea of distributing baskets of hedge funds to counter the risks of fund switching (or lack thereof). But the results have been disappointing.

“We’ve tried,” says the same gatekeeper, when asked about hedge fund baskets.

“It’s all very well and good to present a basket of diversified hedge funds but clients here just won’t bite. All they want to know is who we think the best of the best is and then they concentrate their investments in one or two select managers.”

The lack of appreciation for hedge funds and their role in a multi-asset portfolio may be in part due to the overall dearth of multi-asset portfolios in the first place.

For the past few years, flows have tended towards fixed income. According to one top private bank in the region, two-thirds of flows year-to-date were attributable to bond markets which continue their bull run, egged on by central banking stimulus.

While an UHNW investor with large, long-held equity holdings may be able to

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A P B M A N DAT E

appreciate the value a hedge fund brings by cushioning against future volatility, a yield-chasing HNWI who has sold her equity allocations after 2015’s Shanghai Composite spook may be a different story altogether.

Advisory units that were originally positioning hedge funds as tools to improve overall equity performance are now having to market the same products as vehicles to achieve uncorrelated returns. But without having that dialogue about the benefits of a fully diversified portfolio, the theoretical value of hedge funds is reduced.

a richly-valued fixed income market and the risk of reversal.

“We are recommending event-driven funds,” Tellier says.

“We believe global M&A activities should remain robust and that should provide ample investment opportunities for event-driven managers.”

Despite mediocre year-to-date performance, Julius Baer has found “positive surprises” within liquid alternatives and especially old-fashioned CTAs. At Credit Suisse, three themes have stimulated interest among clients in Asia: equity

A lesson to be learnt from 2015 equities

Regardless of current demand, private banks continue to promote the need to increase allocation into hedge fund strategies.

According to a 2015 PIMCO survey, 69% of private bank distributors in Asia indicated that they will look to increase exposure to liquid alternatives, driven primarily by concerns about meeting return targets.

But should demand pick up, private banks have much to learn from equity flows in 2015. In addition to the rapid rise of equity prices, private bankers were either Hedge funds turning actively fuelling the euphothe corner ria or leaving clients to their After a turbulent first two own devices without reining months for hedge funds in in excessive optimism.

2016, the alternative asset class “If the industry had unihas turned the corner. In the formly tamed the high risk the third quarter, the HFRI appetite after the ShangComposite Index delivered an hai-Hong Kong Connect additional 2.96% in returns. launch, maybe there would’ve “Performance of hedge been more participation in funds as a whole has been this year’s rally,” says one somewhat below expectation – Arnaud Tellier, BNP Paribas Wealth Management head of a family office, who so far this year compared reveals that he struggled to to bonds or equities,” says stop a client from adding Arnaud Tellier, head of investexposure in 2015 and then to ment services, Asia at BNP market neutral, low net exposure and opporincrease equity exposure in 2016.

Paribas Wealth Management. tunistic trading strategies; uncorrelated “Convincing clients to follow a “In our view, it has a lot to do with strategies, such as insurance-linked and disciplined approach while ignoring dayhigh inter-correlation amongst stocks quantitative approaches; and fixed income to-day market movements will set the which has challenged many hedge alternatives that allow macro managers to foundation for a good wealth managefund strategies, especially equity long/ take a view on price, rates and duration. ment business,” he adds. short. Nonetheless, if you look at HFRI “We have been disappointed in eventUltimately, the onus is on private Composite Index (through the end of driven strategies, especially those caught bankers to ‘forcefully’ distribute in a August), after posting losses in the first out last year with significant exposure in diversified fashion to avoid those lulls two months of the year, hedge funds have healthcare, pharmaceuticals and biotech that follow drawdowns, especially for now produced gains in six consecutive due to controversies about tax domicile hedge fund investments where performonths with a healthy +3.4% return and and price fixing,” shares Donald Rice, mance is much more disparate compared low volatility.”

Credit Suisse Private Banking’s head of with the long-only universe.

There are currently 30 liquid alternaalternative investments APAC. Yes, one may collect fees for one-off tives approved on BNP Paribas Wealth “We are focusing on offering single transactions but doing so could come at Management’s platform. Half were manager solutions to clients who have the cost of future revenue should conselected over the past couple of years, been receptive, especially among the centrated bets turn sour – especially if consisting mainly of equity market neugroup of investors who did not necessarinvestor appetite for other asset classes tral, global macro and event-driven ily do poorly during the financial crisis also diminishes. And the trust required funds. Within fixed income, the bank and [who] have had the tendency to be to rebuild faith in hedge funds could take mostly offers relative value strategies slightly more sophisticated.” years. which it finds attractive as a hedge due to

Performance of hedge funds as a whole has been somewhat below expectation so far this year compared to bonds or equities.

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Funds Selection Nexus 2016 In the first week of October 2016, Asian Private Banker brought together Asia’s most senior private banking fund selectors for its annual Funds Selection Nexus, held in both Hong Kong and Singapore.

The morning consisted of three off-the-record breakout sessions hosted by Allianz Global Investors, First State Investments and Hermes Investment Management and two Leaders Conversation Panels that discussed and debated client demands and product innovation amidst challenging market conditions.

Among the attendees were: Jaye Chiu, Head of Investment, EFG Hong Kong; Roger Bacon, Head of Managed Investments, Asia, Citi Private Bank; Stefan Lecher, Head Client Portfolio Management APAC and Co-Head Content Management APAC, Investment Products and Services, UBS Wealth Management; Aman Dhingra, Head of Funds Solution, Asia, Union Bancaire Privée; Charis Wong, Vice President, Head of Fund and ETFs Hong Kong, Private Banking Asia Pacific, Credit Suisse; Ernest Chan, Head of Investment Management Services Asia, Private Wealth Management, Morgan Stanley; Karen Tan, Head of Global Products & Solutions – Fund Advisory, Deutsche Bank Wealth Management; Paul Stefansson, Head IPS Portfolio Specialists Singapore, UBS Wealth Management; Prashant Bhayani, Chief Investment Officer, BNP Paribas; Hakim Naji, Head of Investment Funds Asia, CA Indosuez; John W. Cappetta, Head of Fund Investment Specialists Asia, Julius Baer; Rodolphe Larque, Head of Funds and ETFs, Asia Pacific, Credit Suisse

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INDEPENDENT ASSET MANAGERS & FAMILY OFFICES LEADERS CONVERSATION The Fullerton, Singapore November 01, 2016 8:30am – 12:30pm apb.news/iflcsg2016

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For more information, please contact Koye Sun (koye.s@asianprivatebanker.com)

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