Wealthy individuals in China are showing a greater appetite for risk and are increasingly turning to alternative investments, according to a study by McKinsey, the consultancy, of 800 high net worth individuals (HNWIs) across 19 Chinese cities.
About 71 per cent of the people McKinsey spoke to at the end of last year said they were looking for high-risk, high-return investments. Each of those individuals had at least $5m in investable assets.
Investors also expressed interest in "innovative products", which include structured, highly leveraged and lending products, says Kenny Lam, a partner at McKinsey and the head of its Asia private banking and wealth management practice.
About 83 per cent were found to invest offshore, with 40 to 50 per cent of their assets physically located outside China, according to Mr. Lam, citing business needs and product selection as the two significant reasons behind this.
Hong Kong is a popular investment destination for wealthy Chinese as the territory has "the widest range of products" in Asia, while
Singapore is a typical private banking hub, he says.
Mr. Lam's findings are echoed by a recent report from Bain, the consultancy, and China Merchants Bank, which found the number of HNWIs in China, defined as those with at least Rmb10m ($1.6m) in investable assets, more than doubled to 700,000 at the end of 2012, compared with 2008.
The Bain study showed that this demographic is increasingly investing abroad, both for risk diversification and investment opportunities. Half of ultra-HNWIs, or those with at least Rmb100m ($16.2m) in investable assets, now invest overseas.
"Chinese HNWIs' needs for overseas asset allocation are on the rise in an era of capital globalisation," reads the study. And Chinese banks, it says, "should leverage their deep understanding of and good relationships with Chinese HNWIs, and develop models that best suit their strategy to accelerate their overseas expansion."
Mr. Lam recognises that with the growing wealth in Asia there are plenty of opportunities for private banks, but he says the challenge lies in finding the right relationship manager. He adds that he has come across wealthy clients who say: "I don't want a 30-year-old telling me what to do with my money."
High turnover in relationship managers is a challenge for private banks in Asia. Currently, the turnover rate is about 30 to 35 per cent a year in Asia, Mr. Lam says, noting that if a bank could get that percentage down to 20 per cent, it would make "a substantial difference" in terms of how clients view the bank.
If relationship managers "come and go", clients will also tend to be jumpy, he says.
The longer tenure of relationship managers is one of three characteristics of the most profitable private banks in Asia, Mr. Lam adds; the other two are scale and targeted client segments.
"Scale matters to a certain point. You need to get to around $40bn in total assets across Asia for it to be meaningful."
Mr. Lam says he has seen industry participants find success based on very targeted client segments. For instance, there are banks that boast a very focused platform and steer clear of clients who are aged 30 and under.
In Asia, rich individuals are highly investment focused. This is in stark contrast to their peers in Europe, who put a lot more emphasis on preservation of wealth, Mr. Lam continues.
HNWIs in Asia also tend to have multiple banking relationships, he says, noting that a wealthy individual would have on average three or four private bank accounts.
Mr. Lam says he once had a conversation with a wealthy person in Taiwan with $100m assets, who claimed to have relationships with 13 different banks.
"First of all, I don't trust any of them, so I need to diversify," the wealthy individual was quoted as saying.
"I want to make sure my $100m is divided into pieces so, if some of the banks go down, I am still OK."
Financial Times
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