Growing wealth during a health pandemic

Singapore may have entered a technical recession, whereas another Asian financial behemoth - Hong Kong - has been in recession since 2019, even before the pandemic hit the region. However, the Asian wealth management industry is still expected to thrive, having experienced a relatively low volume of managed assets in the region. Faced with an under-penetration of wealth management activity, therein lies a huge potential for Asian financial professionals looking to excel in the “next normal” economy.

Along with offering insights into what a career in this field entails, the recent SMU Master of Science in Wealth Management (MWM) virtual masterclass, Investing in Practice, explored how fund managers use investment tools at their disposal to build portfolios and management wealth for their clients.

Here are some expert takeaways from the session’s speakers: Mr Dennis Lim, Adjunct Lecturer for SMU’s Lee Kong Chian School of Business and former co-CEO of Templeton Asset Management; and Assistant Professor Mandy Tham, Academic Director of the MWM programme.

There is a growing amount of wealth to manage in Asia

The wealth management industry has been around for over 200 years in Europe and the United States. In Asia, it’s a relatively newer sector, and one with great prospects.

According to the Boston Consulting Group, global personal financial wealth has nearly tripled over the past 20 years, rising from US$80 trillion in 1999 to US$226 trillion at the end of 2019.

Furthermore, the share of wealth held by growth markets has steadily increased. In 1999, Asia and other growth regions accounted for just 9.3 per cent of global wealth. By the end of 2019, this had grown to 25.3 per cent of global wealth.

“I see this growth continuing, so I expect the wealth management industry in Asia to be exciting for the next 10 years,” said Mr Lim, who also noted that the Singapore government has been actively nurturing the industry.

“The government wants Singapore to be a regional, if not a global, financial centre. And the tools are in place to help Singapore reach that point.”

New money, new needs

Wealth management usually has three components — wealth generation, wealth preservation, and succession planning. This last area is a major focus for the wealth management sector in Asia.

“Because wealth was created relatively recently in Asia, the region is still learning about the knowledge and competencies needed for passing wealth on to the next generation,” said Asst Prof Tham. The MWM programme, for instance, helps its students to build up these competencies through stints in the Yale School of Management in the United States, and the University of St. Gallen in Switzerland.

“There is a lot of potential for growth in areas such as family legacy planning and estate planning.”

Managing wealth during crises

Wealth has proved resilient in the face of crises in recent decades. Over the last 20 years, there have been three periods when the global pool of wealth declined: in 2002, following the bursting of the dotcom bubble; in 2008, due to the subprime crisis; and more recently, because of the trade war between the US and China. In each case, Mr Lim notes, growth bounced back fairly quickly.

Responding to a masterclass participant’s question about how the current pandemic will affect the way the wealthy steer their asset allocation, he responded: “Many of these clients are very sophisticated. Lay investors may tend to see this as a risky period and want to pull back and preserve their capital. Sophisticated investors see this period as an opportunity. They're looking at a longer time horizon and what companies will benefit in that future environment, and they are taking positions.”

The importance of a roadmap

However, every client is different, and that’s why a clear roadmap is critical. One of the first things a wealth manager does is to sit down with a client and jointly create an investment policy statement, which lays out the goals and objectives of the client. This highly customised document includes the types of risk the client is willing to take, his constraints and liabilities, and how the wealth manager will help the client to meet his objectives.

As a document that establishes accountability for both parties, the investment policy statement helps to “separate decision-making from action-taking”, as Mr Lim put it. “In a crisis, people often panic. When you have this statement, you can go to clients and say, this was what we decided, we should continue with this course of action. Removing emotions from investing is really important.”

The role of artificial intelligence

Indeed, interpersonal communication is a big part of a wealth manager’s job. “Sometimes you get clients with very grandiose objectives, but no appetite for risk,” said Mr Lim. “When there is this kind of disconnect, you have to sit down and talk some realistic sense into the client.”

Beyond that, there are of course the nuts and bolts of putting together an investment portfolio. Typically, there are four steps to this process, says Mr Lim. “You generate some investment ideas, research these ideas, identify the investments for the portfolio, and then do monitoring and risk management. The objective is always optimising risk-adjusted returns. You take three factors into consideration: the investment goal, the time horizon, and risk tolerance. The steps you take in creating and managing a portfolio allows the client to understand your strategies and philosophies.”

With the rise of artificial intelligence in investing, however, alternatives such as algorithmic trading (whereby a trading strategy is converted into computer code that buys and sells shares in an automated way) now exist.

“Increasingly, a lot of these functions will be taken over by machines,” Mr Lim believes.

“But there will always be a role for active management. In the fund management industry, where you manage assets, it's easier for a machine to replace a human being. But if you look at the wealth management industry, the story changes. Clients sitting on hundreds of millions of dollars in personal wealth don't want to talk to machines, they want to talk to a person. In wealth management, I think the role of the human being is still going to be significant.”

Noting that the MWM programme includes a module on digital skills, Asst Prof Tham added: “When there is disruption, there are opportunities. We need to understand the limitations of machines, our own strengths, and how to use machines to our advantage.”