Saturday August 22, 2009

Alternative investments

By DALJIT DHESI

Although still in its infancy, Malaysia’s wealth management industry is fast gaining momentum. With more players coming aboard, there is greater need for transparency and disclosure of risks to avoid local versions of recent overseas failures in this field.

AT this time last year, when the US financial crisis had summoned the spirit of the Great Depression, the idea of discussing wealth management was more like a sick joke. A typical response: “What wealth?” How things can really change in 12 months.

Now that the global economy is showing signs of rebounding, many people believe that the wealth management business is set to return to expansion mode. Frustrated with low interest rates worldwide, previously wary investors are beginning to put money in different asset classes to secure better returns.

According to the World Wealth Report 2009, issued recently by consulting outfit Capgemini and Merrill Lynch, the wealth of high net worth individuals (HNWIs) is forecast to start growing again with the economic recovery. It appears that the worst is over.

At the end of 2008, the world’s population of HNWIs (at 8.6 million) was down 14.9% from the year before, while their wealth had dropped 19.5% to US$32.8 trillion, says the report. Ultra-HNWIs suffered more extensive losses in financial wealth than the HNWI population as a whole.

The report defines HNWIs as those with investable assets of US$1mil or more (excluding primary residence, collectibles, consumables and consumer durables), as opposed to ultra-HNWIs, who possess investable assets worth US$30mil or more.

By 2013, the global HNWI financial wealth is expected to recover to US$48.5 trillion, after advancing at a sustained annual rate of 8.1%.

Capgemini and Merrill Lynch also foresees that in the same period, Asia-Pacific will overtake North America as the largest region for HNWI financial wealth, underpinned by increased US consumer expenditure as well as the growing new-found autonomy for the Chinese economy.

Although there is no readily available data on the size of the entire wealth management market in Malaysia, feedback from banks and other financial service providers indicate that it is growing and that there are plenty of opportunities for expansion.

A market with potential

Wealth management started when Swiss and other European private banks offered services to cater to the HNWIs as far back as the 18th century. The clientele has since widened to include retail investors.

Today, wealth management helps consumers with sizeable assets on how to plan, manage, invest and distribute the assets, based on their risk profiles and financial goals.

The majority of the financial institutions in Malaysia offer such services to those with assets of RM200,000 and above.

Perkasa Normandy Managers Sdn Bhd executive director Dinesh Virik says apart from the conventional deposits, the main wealth management products in Malaysia are unit trusts, bancassurance (notably investment-linked funds) and investment products like structured and treasury products.

(The Perkasa Normandy group is a licensed financial services provider that offers wealth management consultancy services to banks in the areas of investor profiling, asset allocation, portfolio strategies and product infrastructure.)

Dinesh points out that because fixed deposits offer conservative returns, it is natural for people to look at alternative investment for better returns to achieve their financial objectives.

According to him, the sales volume last year for structured products was about RM25bil. He anticipates that this will grow in the coming years.

The net asset value (NAV) of unit trusts as at June this year was RM164bil, an increase of about 22% against RM134bil at end-2008. NAV refers to the value of the underlying assets held by funds, minus liabilities.

In addition, figures from the Life Insurance Association of Malaysia (Liam) shows the bancassurance segment’s share of total new business premium grew from 2% in 1994 to 42% in 2008.

Judging from these figures, says Dinesh, the wealth management industry has bright prospects, particularly with the likelihood of new products and players coming into the market.

Malayan Banking Bhd (Maybank) senior executive vice-president and head of consumer banking Lim Hong Tat agrees.

“Wealth management is a very profitable market segment. Many financial institutions are redefining their business models to capture a share of this segment by delivering a wide range of value propositions with trusted advice,” he says.

“The industry in Malaysia has substantial room for growth, with an increasing number of individuals demanding a more personalised service.”

Their increasing needs and sophistication have led to a broadening of the industry’s menu of products and services, ranging from the traditional insurance and unit trust products to the more complex alternative products.

Since 2007, the number of Maybank’s HNWI clients grew by over 45% and total financial assets under management rose by 51.5% to about RM46bil as at June.

Duty of care

Maybank offers wealth management products and services to high net worth customers (those with total financial assets of at least RM1mil) and ultra high net worth customers (RM4mil and above).

Citibank Bhd, through its wealth management business, Citigold, is upbeat about the business, expecting it to grow in double digits over the next three years.

In the last five years, says the bank’s head of wealth management products, Aisyah Lam, it has achieved more than 60% growth in assets under management and currently have more than 30,000 Citigold clients in Malaysia. Citigold is open to individuals with a minimum portfolio value of RM200,000.

With the proliferation of investment products in the market, some industry observers believe that financial institutions may be more motivated to push products rather than meet the financial goals of investors. The fear is that this may lead to a recurrence of the problems seen in Singapore and Hong Kong.

The Monetary Authority of Singapore recently banned 10 financial institutions from selling certain investment products, notably structured ones, in the country. In Hong Kong, there was a similar case of a mis-selling of these products. The Lehman Brothers collapse was also partly due to such cases.

However, Perkasa Normandy Managers head of research Pretta Mehrotra discounts the possibility of such occurrences in Malaysia. She argues that the industry here is much regulated, although she says further checks and balances should be in place to protect investors.

For example, it ought to be ensured that a client’s funds are not over-exposed to one product. Instead, he should have a diversified portfolio.

“There is also a need to advise clients periodically on how their investments are performing so as to maintain and grow trust and credibility in the wealth management industry,” Pretta adds.

“The financial institutions, through their sales advisors, owe a duty of care to explain to investors the investment products they are recommending in line with the investors’ financial goals and risk profiles.

“Most of the time, investors either don’t understand what they are buying and therefore shy away from asking, or they strongly rely on their financial advisors when investing.”

For example, she notes that many investors are aware that structured products protect or guarantee their capital, and provide capital gains. However, they do not realise the downside of these products when economic conditions become unfavourable.

Often, she adds, customers are also not told that sales charges are taken out from any gains made from the investments before the balance is distributed to the investors.

Another aspect that investors are poorly informed about is that fixed deposits provide stable, predictable returns, unlike structured products, which are tied to the health of the economy.

Dinesh says financial institutions should properly train their financial advisors to ensure that clients are thoroughly briefed on the wealth management process.

He explains that the process involves engaging an investor, understanding his financial objectives, working out a diversified portfolio for investing over a period, and most importantly, constantly monitoring the portfolio.

The National Union of Bank Employees (NUBE) recently urged the Finance Ministry and Bank Negara to take immediate steps to stop commercial banks from “mis-selling” financial products through their employees.

National news agency Bernama quoted its secretary-general as saying that NUBE members were being pushed by “greedy superiors” to meet sales targets for financial products.

The union added that bank employees involved in selling such products were not well versed with them and thus, could not provide consumers with adequate explanations when selling the products.

A recent study by international consultancy firm KPMG shows that the investment management industry needs to work a lot harder around investor education and communication.

Transparency and disclosure

So how does the industry view such concerns? Are wealth management services a guise to promote certain investment products by financial institutions? Is there a lack of transparency in disclosing risks to investors? Are the institutions’ financial advisers properly trained to understand the investors’ needs?

On risk disclosure and whether the services are overly focused on selling certain products, licensed financial adviser Jeremy Tan of Standard Financial Planner Sdn Bhd says these depend on the financial institutions’ strategies in promoting investment products.

“Consumers’ financial goals and objectives needs to be their priority. They need to assist consumers to draw up their financial road map based on the latter’s needs and then only match the investment products to those needs and financial road map. Returns always commensurate with risks tolerance level.

“The higher the return expected, the greater the risks consumers is to undertake. Emphasis on returns to consumers to market a product is irresponsible without taking into consideration the investment goals, risk profile of the consumers and the existing portfolio and assets class currently invested,” Tan stresses.

Tay Han Chong, senior vice-president and senior head of personal financial services division at United Overseas Bank (M) Bhd, says as a licensed financial institution under the supervision of Bank Negara, the bank has the system and process in place to ensure that all product offerings are in line with the respective customers’ desired risk-return profile.

A transparent and responsible selling process is the key to sustaining a viable wealth management business in the long run, he explains.

According to Maybank’s Lim, the bank does not believe in product pushing, but provides advisory services that are tailored to the customers’ investment portfolio, consistent with their risk-return expectations.

He says the bank continuously advise and update customers via various activities, including the ongoing Investment Fairs, as part of its move to provide holistic financial services to customers.

MyFP Services Sdn Bhd financial planner and managing director Robert Foo, on the other hand, feels there have been many cases where high-sounding labels such as wealth management have been used as a “convenient mask” for sales advisors to push their products.

Foo feels the advisor or the wealth manager should be compensated more for his professional advice and services than merely his sales.

Emphasising client education, Citibank’s Lam says it has to be on-going basis as investment products continue to evolve and the sophistication of investment tools increases.

Brokers or advisors?

Some people view sales advisors in banks as “product brokers” as they are not properly trained to advise clients on the right choice of products, unlike fund managers or treasury personnel.

RHB Banking Group head of retail banking Renzo Viegas says all three categories of players operate differently although there is common ground in that some of the products they sell are the same.

“There is no basis or fundamental reason to assume that fund managers or treasury personnel are more adept in their knowledge of investment,” he argues.

“The difference lies in the respective job function. A treasury personnel is more in tune with treasury products, while a fund manager manages a portfolio of stock and bonds. This allows them to be more specialised.

“However, a wealth management advisor is expected to have an understanding of both areas to be able to advise their clients, though they may not be specialists in those fields.”

HSBC Bank Malaysia Bhd general manager (personal financial services) Lim Eng Seong says in HSBC, for example, all sales staff are required to sit for the Federation of Investment Managers Malaysia’s (FIMM) unit trust consultant exams before they can sell unit trust funds.

In addition to FIMM’s licensing requirement, sales staff are required to attend a course on the fundamentals of investment, which comprises of modules covering unit trust investment, understanding structured products and dual currency investment.

Product training is also compulsory for all sales staff for each product launch. They will be certified via a test before they are granted accreditation and eligibility to sell the product, says Lim.

However, Foo of MyFP Services feels the sales staff/relationship managers at the front desks of many financial institutions are merely trained to “parrot” and sell certain products.

“Most are unable to explain in detail how such financial products actually work and how they are able to generate a return or mitigate risk,” he contends.

For Malaysia’s wealth management industry to flourish, financial institutions should ensure their products are simple for investors to understand.

There should be also sufficient transparency and disclosures in terms of the risks of these products.

The financial intermediaries and sales staff should have adequate knowledge to recommend products that suit investors’ financial goals and risk profiles.

On the flipside, investors need to be educated on what they are investing in. At the same time, regulators need to ensure that investors protection continues to be of paramount importance.

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