EXCLUSIVE: PwC In Asia Frets That Wealth Sector Has Short Memory, Not Enough Has Changed

Titien Ahmad

14 July 2014

Justin Ong, Asia Pacific Asset Management Leader from PwC Singapore, does not see the wealth management industry changing its ways any time soon, especially as the market is beginning to pick up.

In an interview with WealthbriefingAsia, he said: “We all expected a lot more change coming from the banks, but the truth is when you look at what’s happening today, things are taking a longer time to change.”

Ong believes the industry has a short-term memory: “When the market starts to pick up everyone forgets about what’s happening in the industry and we saw a bit of that happening again last year.”

Although the market has shown signs of recovery, Ong says that it’s “not quite out of the woods yet".

“It’s still very thematic, driven by the short term and the next good thing to sell. During the crisis, wealth managers have said that they’ve learned their lessons and will do more forward planning, more wealth management but I don’t see that happening," Ong continued.

The wave of investment bankers heading private banks is not helping the industry either, said Ong. “It just accentuates the whole situation. The whole strategy where private banks try to be like investment banks is really the wrong way to go. Private banking needs to be more like asset management, more long-term thinking and less of a stock-taking type of mentality.”

“I think that’s sad, we’re not really building a sustainable business model. Everyone understand the theory behind it, but operationalising it is more difficult,” Ong said.

Cost-cutting: too little, too late
Years of high operational costs have dogged the industry and cost-income ratios of more than 90 per cent were not unheard of when expensive private bankers and intensive set-up investment are required from the outset. More recently, banks have started to trim their costs and cut back operations from high-cost markets in a bid to be more efficient.

Ong is not optimistic that this will work. “Operational efficiency is a disguise as private banks need to cut costs. Instead of saying, ‘I need to cut cost because I’m losing money’, it becomes ‘I want to be more operationally efficient or I’m right-sizing’,” he said.

“Over the last decade, a lot of banks are building their front office but not necessarily the back office. We’ve seen some banks investing a lot in infrastructure which is the right thing to do but it will always be difficult to get senior management to spend money on the back-end. We’re also seeing banks investing in digital which was not the case two to three years ago,” Ong said.

Digital the way forward
Ong pointed out that when his team first pushed digital strategy three years ago, “not all banks like that stuff as there was no personal touch".

Now he sees that the mood has changed as banks are investing to become not just more operationally efficient but to also enhance the whole customer experience.

“Digital is still a front-end investment but it is the right way to do it without increasing your cost too much as it’s meant to allow you to access new markets, new growth and new revenue streams,” he said.

Opportunity still in pure-play, China and Indonesia
Ong believes that future growth lie in the pure-play private banks that can demonstrate objectivity and unbiasedness.

Market-wise, Ong is putting his money on China. He said: “If you look at opportunities across Asia as a whole, China is a clearly the market that you have to look at but it is always a long-term play."

"Indonesia is a mature wealth market but when you look at the banks there, the results tend to show that China and Indonesia is where they continue to develop growth in deepening wallet share. So those markets will continue to be big drivers for this industry,” he said.

Although the recent landslide win by Narendra Modi has put India back on the investors’ spotlight, Ong says that it is not an easy market for private banks to tackle.

“It’s difficult to do business there, how many banks actually do well in India. The real money is in the non-resident Indian (NRI) market, the local market is still a mixed bag. If I look at anybody with real wealth, a lot of it is parked outside of India. People will look at the most stable geography to park their assets,” he said.

A 2012 PwC report claimed that Singapore will overtake Switzerland in the next 10 years.

When asked if this is still the case, Ong said: “Singapore will not overtake Switzerland in terms of assets under management in the next five or even ten years. But Singapore will show a higher pace of growth because we’re coming for a smaller base, we’re about half the size of Switzerland in assets today. It will be a long time before we catch up in terms of global assets.”

Even with the crackdown on tax evasion and the push for Switzerland to disclose tax evaders, Ong does not believe that European and American wealth will pour into Singapore.

“It’s a nice story but we haven’t seen it happening in the last ten or 15 years. There is no reason why we would see it when the pace of wealth growing here exceeds that of the West. With the FATCA tax transparency agreement, it won’t make a difference where you are. You will stay in the jurisdiction where it’s politically stable and you’re secure regulatory-wise,” he said.

Change needs fresh blood
The topic of discretionary management and a fee-based model has been talked about but the reality is that many wealth managers are still struggling to justify the model to their clients.

“Discretionary portfolio management is the right move but it’s questionable whether we’re ready as a group to move in that direction. It has to happen at some point but it’s still an education process for clients and bankers,” Ong said.

“Clients may be prepared to pay for advice or a retainer to an external asset manager or pure-play advisor but they will not be prepared to pay a bank as they see it as just a product platform. It can’t be a blanket charge unless the regulator puts a ban on commissions,” he said.

Ong is not optimistic that this situation will change anytime soon and believes the industry requires fresh blood both from the clients and bankers.

“It might require a generational change, I’d like to see what happens when the next generation takes over the wealth and the next generation of private bankers enter the industry. “Until that happens, I think this industry will toddle along with the market,” he concluded.