Lessons Learnt Globally: An External View of the High-Net-Worth Proposition in Australia
Wealth, while viewed with a different lens in Australia, is on the same trajectory globally and stands to gain from a revitalised High-Net-Worth strategy.
A snapshot of the Australian private banking and wealth management landscape
The Australian private banking and wealth management market has been shaped by specific local conditions against the backdrop of compulsory superannuation since the 1990s. With the bulk of savings occurring on a default basis via super funds rather than a proactive basis through wealth management platforms, there hasn’t been much self-directed investing in Australia as compared to the rest of the world.
Nonetheless, the number of High-Net-Worth (HNW) investors in Australia has reached a record high of almost half a milion in 20191, and the number of Ultra-High-Net-Worth (UHNW) individuals is projected to rise to 4,884 by 2025, up from 3,796 in 20192. Recent reports have also indicated that the demand for alternative investments is growing, with global wealth projected to increase significantly. And while the wealth industry is set for growth, the HNW population becomes more sophisticated.
The onset of evolving client demands, recent technological innovations and increasing regulatory attention on the industry have sparked movement amongst industry players. Mergers and acquisitions (M&A) activities have picked up, as seen with the recent acquisition of a large wealth management firm in Australia. Firms may discover that focusing their client strategy through the targeting of specific demographic segments could be the most effective path to asset growth.
These market trends thus raise the questions: what does HNW mean in Australia; how does it compare with the major players in the world; and how should the HNW proposition shape up in Australia?
What HNW means in Australia
The HNW segment
The criteria for being considered a HNW Individual (HNWI) varies according to the source. The Australian Taxation Office (ATO)3 categorises HNWIs as individuals with net investible assets (NIA) over AU$1 million (or net over AU$2.5 million, including family home) and earning more than AU$250,000 per annum. On the other hand, Investopedia4 classifies a HNWI as an individual with more than US$1 million (AU$1.35 million) in investable assets, excluding primary residence, collectibles and consumables.
The Credit Suisse Global Wealth Report 20195 reported that the composition of household wealth in Australia is skewed towards non-financial assets. Real assets and financial assets both only made up 42% of total assets, with Australians’ mandatory contribution to the superannuation system also contributing to this figure. In comparison, the US reports a high level of financial assets (74%) with more outward foreign investments, and Switzerland, the richest country in the world, invested 55% of their wealth in financial assets and a smaller portion in real assets.
Figure 1 highlights that in comparison to the US, Singapore and Switzerland, Australians invest significantly more in real assets (e.g., property) as compared to financial assets. Some insights can be drawn from this difference:
- With a huge portion of the financial assets coming from compulsory superannuation, this indicates that a large number of Australians could be under-advised.
- Australians are over-exposed to a single asset class. Researcher CoreData6 revealed that most Australian HNW and Ultra High-Net-Worth (UHNW) investors concentrate their wealth in just three asset classes – cash, Australian equities and residential property.
- There could potentially be a largely untapped market in the HNW space as these investors become more sophisticated.
Current challenges for wealth management firms in Australia
The COVID-19 pandemic, for all its devastating effects, has accelerated what could be the fourth industrial revolution. It has brought about waves of change – from the operational enforcement of Business Continuity Plans (BCPs) and triggering of work-from-home arrangements, to the resultant shift in consumer behaviours. Within the markets, we observed record-levels of trading volumes globally and increasing liquidity pressures on financial institutions’ liquidity risk management frameworks.
These pressures arise amidst existing challenges such as growing regulatory concerns, especially in culture and conduct, and climate risk. While the wealth management industry proves to be resilient against the pandemic backdrop, wealth management providers should not only react to the situation, but also adapt quickly and re-focus their HNW strategy. Adopting an external view on HNW is crucial, and we analyse this through the lens of client segmentation, advisory models and must-have design principles for investment platforms.
So, how do we address these pain points? Banks can start by redesigning a digital targeting operating model that is tailored to their core value proposition for their customers, and partner with established FinTechs that provide bespoke capabilities to deliver long-term return on investment for the Bank.
External view on HNW
Across the wealth pyramid (Figure 2) from retail to UHNW, the needs of the client grow in complexity, along with the level of service and demand for highly customised solutions. This increases the cost to serve and, at the same time, the revenue gains.
However, as banks leverage digital capabilities in an attempt to offer a differentiated service to their clients, the traditional lines of the client segments begin to blur. The effectiveness of the HNW segment is driven by product access, education and communication needs, and personalised service. Whilst HNW investors recognise the value of professional advice, their expectations from private banks are shifting rapidly.
In a report by Powerwrap7 , it was found that in an increasingly uncertain environment, HNW investors become more defensive about their asset allocation. This leads to an increased demand for access to alternative assets, such as private equity funds, infrastructure funds, unlisted managed funds and hedge funds, which are not typically available via a platform structure. The report also showed that HNW investors would use an adviser to access a wider range of investments, for a second opinion, or for their technical skills. The boost in uptake of wealth platforms, coupled with the growing demand for access to alternative assets and the increased willingness to engage an adviser, indicate that the continent’s sentiment towards financial advice is improving
These changes in HNW investors’ behaviour, together with technology innovation that has enabled faster processing of complex information, mean wealth managers should seize the opportunity to revitalise their HNW strategy.
More low-touch clients within the HNW to UHNW spectrum can be serviced better through digital tools and platforms. Building upon internal investment platform capabilities will maximise the potential of the shift in client behaviour, freeing wealth managers to better service the needs of clients along the wealthier bands of the spectrum that require more focused attention.
Five types of advisory models
A market-leading HNW offering begins with advisory-focused client building blocks. Profiling clients based on their engagement with the bank creates a better understanding of how a wealth manager should engage with them.
The five types of advisory models — self-directed, transaction advisory, portfolio advisory, discretionary and financial planning — can be classified by their channels of delivery, as seen in Figure 3. Further stratifying the products and services reveals the types of pain points that should be addressed, providing the organisation with insights on how they should organise their capabilities and processes to address the needs of the clients.
Design principles for successful investment platforms
The next crucial component in building a market-leading HNW offering is the investment platform. An investment platform is more than just the technology managing your assets. It is an end-to-end go-to-market proposition that takes into account clients and segments, products and services, operating model, organisational and business structure, as well as the underlying digital technology.
The target investment platform can be defined based on the advisory proposition and design principles, as seen in Figure 4. A well-designed investment platform is one that creates a seamless experience for all users — be it the client or wealth managers. It should serve the holistic client journey with state-of-the-art digital capabilities that is flexible and ready for change architecture.
All in all, the shift in consumer behaviour towards self-service for low-touch HNW clients and the increased sophistication of high-touch clients signal a need to re-strategise the HNW proposition. An investment platform not only addresses their needs but also helps to increase top-line and cost efficiency.
Given the business and technical challenges, a systematic approach towards the advisory proposition and know-how is vital for getting the HNW strategy right in order to tap into the burgeoning HNW market.
How Synpulse can help?
Synpulse supports wealth mangers from the conception of business strategy to the realisation of the operating model. Our approach covers end-to-end project support and is built on proven frameworks and accelerators. We facilitate business strategy and business case definitions, assist in the solution assessment and configuration, and eventually provide full scale implementation of your operating model.
Synpulse has engaged with both traditional private banks and pure digital banking players in APAC and globally, helping them realise their competitive advantage and achieve their strategic objectives.
This article was authored by Navinesh Chand (Managing Director and Country Head, Australia) and Celine Leong (Senior Consultant).