The rapid spread of the novel coronavirus across the world has led to a steep drop in economic activity, as most people worldwide have been compelled to stay at home and keep their distance from others. Public health and safety remain the vital priority in the struggle to end the pandemic, and people everywhere are aware that the appearance of COVID-19 marks a historic change in how they transact almost every aspect of their lives.
The global effort to contain the virus through a succession of lockdowns across countries has affected most sectors, including banking and wealth management in Asia (Exhibit 1).1
Investor wealth in Asian equity markets declined by approximately 10 to 15 percent (or approximately $2.5 trillion to $3.5 trillion2) between February 1 and April 15, 2020. China, the first epicenter for COVID-19, suffered a swift drop in economic activity (13.5 percent decline year-on-year in industrial production in January and February 2020). However, once the number of COVID-19 cases started coming under control and economic activity began to recover, China’s markets also began to regain some momentum. Given that Chinese investors account for approximately 35 to 40 percent of PFA in Asia, this initial recovery bodes well for the region’s wealth-management industry (Exhibit 2).
Leaders must plan across three time horizons
While there have been positive developments in fighting this disease, Asia is not out of the woods, and wealth-management firms—be they long-established incumbents, financial institutions seeking to grow a recently established wealth-management business, or new entrants—must act fast and decisively both to meet the immediate challenges and to emerge in the strongest possible position in a world that will be significantly different once COVID-19 has been brought under control. This will require leaders to think simultaneously across three time horizons, to plan and manage their response to the COVID-19 crisis, while at the same time leveraging the changes required today to prepare for the future and advance their long-term strategic goals.
- Horizon 1: Managing through the crisis. In the short term, as long as COVID-19 poses a threat to health and safety, ensuring business continuity is the first priority. This includes taking clear, well-communicated steps to protect the health and well-being of employees, educating investors on holding steady through market volatility, and upgrading the infrastructure for alternative channels of engagement, including the systems underpinning remote working arrangements. Especially in periods of severe market volatility, frequent communication is crucial for maintaining and strengthening investors’ trust in financial institutions. Wealth-management associations and regulators also play an important role in keeping the public informed and reducing the impulse to panic.
- Horizon 2: Stabilizing and unlocking new growth opportunities. In the medium term, as markets and economies begin to stabilize, wealth-management organizations should focus on upgrading digital and analytics infrastructure across the value chain of wealth management and upskilling their relationship managers (RMs) in preparation for increased reliance on digital engagement models, as customers are not expected to return to physical channels at the same levels observed prior to COVID-19. At the same time, they should identify new opportunities for organic and inorganic growth, which are expected to emerge post-COVID-19, and prioritize these opportunities by customer segment, geography, and channel. Organizations should also develop new approaches to needs-based customer advisory, including self-directed digital-led advisory, in anticipation of a quickening shift from execution to discretionary mandates.
- Horizon 3: Competing in a new world. For the long term, leaders must prepare for an industry that will look significantly different. Incumbents and new entrants must take stock of the new market reality and reinvent the wealth-management business for growth, carrying through with the shift to advisory and optimizing the balance of physical and online channels. These changes in business model and delivery channels will also require firms to reskill their sales representatives and RMs, in some cases involving extreme shifts from a “product-push,” transactional way of working to a client-focused advisory relationship in which RM and client interests are more closely aligned. Firms should also establish a rigorous process (directed by a team of senior leaders) to evaluate potential merger and acquisition candidates against criteria aligned with the strategic vision for the next normal.
Each horizon presents numerous hurdles requiring considerable agility, and we expect that firms that navigate the turbulence successfully will emerge transformed and well positioned to thrive in the new world.
What will the next normal look like?
The COVID-19 crisis has already accelerated change in Asia’s wealth-management industry, and once the pandemic at last subsides and the global economy begins to recover, wealth-management firms must be prepared to compete in the next normal. What will this new world look like?
First of all, it will entail a renewed emphasis on operational risk. The physical distancing adopted in many countries to limit the spread of the coronavirus has required wealth-management companies to accommodate mobile working and flexible work scheduling for employees. This will keep business continuity planning and related operational risk management in the spotlight like never before. Regulators may require wealth managers not only to strengthen business continuity plans but also potentially to set aside capital for any similar future scenarios bearing implications for firms’ fiduciary obligations.
Second, investors, compelled to increase their use of digital channels, will in all likelihood recognize the advantages of digital interactions and make an enduring shift from “branch first” to “digital first” ways of engaging with RMs and customer service representatives. Firms must ensure that their digital and analytics infrastructure is up to the task, including portfolio advisory and execution capabilities, as well as general communication.
A third factor in the transition to the next normal is the potential for industry consolidation. The COVID-19 crisis is already taking its toll on small firms and fintechs, and in time these firms may seek new avenues for raising capital. At the same time, lower valuations amid market turmoil may present acquiring firms with an opportunity to increase scale, gain new capabilities, or enter new markets.
Finally, the current market volatility and related capital-market losses are expected to influence investor behavior. Asia’s investors have traditionally preferred execution mandates, which afford greater control over their investment decisions, and over the short term, this will likely be reflected in two temporary trends: 1) An uptick in execution-related trades among investors seeking to take advantage of the volatility; and 2) A move to cash and other low-risk assets by investors seeking to reduce exposure to capital market losses. Over the mid to long term, however, some investors will seek to stabilize the performance of their portfolios through professional advisory. Others, whose trust in financial advisors and possibly the entire financial system could weaken in response to the current crisis, may prefer to seek self-guided advisory. In either case, wealth managers may see an opportunity to provide tailored, customer-centric advisory and discretionary services as an add-on to their existing execution-based offerings.
As a corollary, we also expect to see onshore markets continuing to grow faster than offshore hubs3 in managed assets for HNW+4 clients. Diverse regulations, including common disclosure requirements and tax amnesty programs, have already accelerated this shift, with onshore assets under management (AUM) increasing from 43 to 46 percent of total Asian HNW+ AUM between 2016 and 2019. As a consequence of the COVID-19 crisis, we expect that customers will be increasingly inclined to keep wealth close at hand while balancing offshore diversification. Most organizations will need to reevaluate their onshore and offshore strategies in light of the new equilibrium.
To meet the challenges and opportunities arising from these changes, firms will need to fundamentally reinvent themselves around four pillars: increased emphasis on operational risk, adoption of digital tools and data analytics, industry consolidation, and the transition to client-centric advisory.
Weigh strategic options against three possible scenarios
We remain cautiously optimistic about the future of Asia’s wealth-management industry and anticipate that leading firms will emerge from the COVID-19 crisis with a new strategic vision and purpose and stronger relationships with customers, shareholders, and regulators. Without a doubt, however, the overall future potential for the industry is constrained relative to what firms had been anticipating (and planning for) before the start of the pandemic. As organizations reevaluate their business plans and think through structural interventions and tactical steps, it will be imperative to weigh their options vis-à-vis different economic scenarios.
We have modeled potential growth opportunities for Asia’s wealth-management industry against two of McKinsey’s nine scenarios of GDP growth that we view as most probable: in scenario A3 (“virus contained”), most countries succeed in slowing the rate of contagion enough to resume commercial activity and regain precrisis levels of production in the next one to two years. In scenario A1 (“muted recovery”), the epidemic lasts longer, with severe economic impacts that lead to a more drawn out recovery over the next two to three years.
How soon the recovery begins and how quickly it gains momentum will, of course, be major factors in determining the potential for growth available to wealth managers, in line with the growth trajectory of Asian investors’ PFA. Depending on which of the three scenarios plays out, the Asian wealth-management industry’s new revenue over the next five years could significantly undershoot previous projections.
As of year-end 2019, Asia’s wealth-management revenue pools stood at an estimated $90 billion5 and (prior to the COVID-19 pandemic) had been forecast to grow by approximately $70 billion in new revenue in 2025. By contrast, forecasts using the assumptions of our “muted recovery” scenario indicate that incremental revenues would reach approximately $25 billion in 2025, with total projected revenue for 2025 being 30 percent less than the original forecast.
What is more, the cost structure for the industry will likely change as the customer segment mix evolves, with affluent and mass-affluent segments projected to account for approximately 50 to 60 percent of onshore revenue pools by 2025. Organizations will need to think carefully about how their operating models must evolve to ensure channel rationalization and optimization aligned to the customer segments with direct impact on business economics.
Each scenario shows that the COVID-19 crisis will in all likelihood lead to smaller revenue pools for Asia’s wealth-management industry over the short to medium term than had been projected until the start of this year. They also suggest, however, that investor wealth levels would revert to historical growth rates by 2023. Wealth-management firms must, therefore, compete more aggressively than ever to address customers’ needs and build market share. As customer needs vary by segment and geography, firms will need to craft their strategy in line with their core value proposition and strategic aspiration for the post-COVID-19 world.
For example, international wealth managers operating in offshore locations may choose to double down on their share of wallet among the current HNW+ client base, while in parallel identifying and prioritizing onshore market opportunities and the mode of market entry and/or business growth. Onshore retail banks and insurance firms, by contrast, may elect to double down on the affluent and mass-affluent opportunity with a modular advisory offering leveraging digital as the central building block for a scalable and low-cost business.
In the full report, available for download below, we examine the four pillars of the next normal and the building blocks that each wealth-management firm must assemble in order to reinvent itself. We then outline the growth opportunities available primarily to three types of firms—local and regional banks, insurance companies, and international wealth-management firms—and the crucial steps required to overcome the challenges inherent to each business model, as firms seek to capture new growth and increase market share.
Download Asia wealth management post-COVID-19: Adapting and thriving in an uncertain world, the full report on which this article is based (PDF—2MB).