Growth in wealth in Asia will outstrip all other regions. In fact Asia (excluding Japan) will experience the highest growth in global individual wealth, which is expected to grow by between $45 and $50 trillion by 2017 - that is 11 per cent compound growth on 2011.
However, many investors and financial institutions could miss out on opportunities if they fail to stay ahead of the trends reshaping both the financial system and Asian communities.
Looking ahead I see the wave of change sweeping across Asia will have a big impact on the Australian financial services industry, driving innovation across the sector.
For a start, Asians in key markets are getting older and richer. Asia is forecast to have 3.3 billion middle class individuals by 2030, a six-fold rise from current levels, according to an OECD report. The region already boasts close to four million high net wealth individuals with a combined wealth of $10 trillion dollars, according to RBC Wealth Management Capgemini. This will rise quickly in coming decades as Asia’s rapid economic growth rate combines with high savings rate to grow the net wealth of the region’s population.
The rapid growth in Asian wealth is part of the necessary deepening of the Asian financial system, a critical next step in the “Asian Century”. Since the Asian crisis in 1997 the huge - and growing - pool of domestic savings has in large part been invested in global markets via the accumulation of foreign exchange reserves. This is now beginning to change as Asia’s financial markets develop.
The need for savings is increasing with the number of people aged over 65 in many Asian countries expected to double in 25 years. However, the coverage of most pension systems in Asia is limited at less than 40 per cent of the labour force compared half that of OECD countries, according to a report from Fung Global Institute. Also, the size of private pension assets of the nine most developed pension systems is small at 5 per cent of GDP, compared with the OECD’s 70 per cent of GDP.
With the rapid ageing of Asia’s population, there will be increasing pressures from an income equality perspective for pension systems to support the elderly as close family ties weaken.
The growth potential then for pension assets is significant. To date most governments in Asia still directly manage the accumulation of pension contributions from their workers. Overtime, with deregulation and the implementation of the funds passport, this could create multiple opportunities for Australian wealth managers to produce and distribute tailored and sophisticated pension products for this market. In China alone the National Council for Social Security pension fund has RMB 868.8 billion (A$150 billion) in assets under management.
The gradual shift from trading to savings will lead to a more fund-based, annuity style of investing even though the majority of Asian savings are still in cash, private business and direct real estate. Investment needs are slowly evolving towards solutions that offer growth (higher yields) on a tax effective basis.
As individual and family needs become more complex due to growing GDP and wealth, there will be an increasing shift to “holistic” investment advisory services in discretionary and mandated products. And as families develop an intergenerational horizon and develop a better understanding of long term wealth creation, there will be the opportunity to develop lifecycle and goal based solutions.
This growing sophistication will also lead to requirements for integrated custody, transactional, tax and reporting services and increasing connectivity of banking and wealth services across Asia.
Moreover, there is another significant demographic shift taking place: the growing power of women. Women control or influence 67 per cent of household investment decisions. In Asia, women control 29 per cent of wealth assets ($2.8 trillion) and this has grown by nearly 30 per cent since 2009. With the momentum of women earning more and rising through the corporate ranks increasing and the earlier mortality rates for men, this trend is expected to accelerate.
Australian wealth managers are well positioned to participate in this transformation and capture a dominant share of the increase in demand for wealth management services. After 20 years of mandatory superannuation, Australia has core capabilities in retirement savings and investment advice. It is increasingly recognised as the Switzerland of Asia Pacific after the handling of the GFC helped build Australia’s reputation as a safe haven, one that is secure, well regulated and stable.
Of course Asians are drawn to Australia for its lifestyle factors with Australia the most preferred destination for secondary and tertiary education of Chinese students after the USA and UK.
Asian clients are discerning and demanding. They seek high quality service, personalised advice and greater convenience in connecting to and purchasing solutions online. They will seek trusted partners who offer self-direct platforms and can help them with scaled advice, business introductions and family matters such as settlement and education.
The average Asian private banking client has at least four banking relationships and is always seeking diversification. This means they are open to new ideas and providers. This openness to diversification means that wealth managers offering innovative solutions have the opportunity to build new and deeper relationships with clients.
They want to invest in longer term growth assets beyond the cash and fixed income spectrum with equity, infrastructure and real estate assets in demand. And they want their bank to be safe and have a strong super regional presence that can connect clients with experts across Asia, Pacific, Australia and New Zealand.
This is a significant opportunity for banks such as ANZ. Asia’s economy already accounts for a quarter of global economic output, up from 17 per cent two decades ago. Asia’s share is expected to rise to 35 per cent in 2030 and to be over half the world economy by 2050, according to ANZ’s insight report, Caged Tiger: The Transformation of the Asian Financial System. If anything, wealth predictions may be under stated.
For wealth managers to position themselves for the future they must have a competitive and relevant suite of wealth solutions and advisory tools to meet customer’s personal, business and family needs. They must be able to connect clients with experts across the region if they are to create value and prosper from the Asian wealth boom.