Wealth Management in the Philippines: Opportunities and Challenges in Abundance
The wealth management business in the Philippines offers immense opportunity, but by wide agreement amongst industry experts, progress is slower than it should be for a country whose economy, population and private wealth are growing so fast. Hubbis and our exclusive partner for the event, Allfunds, co-hosted a private and off-the-record discussion to debate the state of the industry.
The discussion opened with a brief introduction from Alexis Fosler, the Allfunds CEO for Asia Pacific and also from Manoj Prajapati, Head of Sales for South Asia. They both summarised Allfunds, its digital platform and its relevance for wealth managers in the Philippines and the wider region.
The discussion began in earnest with one guest focusing on regulation as the starting point for the conversation. A guest highlighted how the regulators, particularly the central bank, have been trying to come together to facilitate centralised storage of customer information that can be used across all financial services and other related providers, not just by the bank initiating the KYC, for example.
“But,” he commented, “there must, of course, be safeguards so that there is no unnecessary access, as there is the natural fear of the pirating of accounts. I myself think we can come together and agree on having a minimum amount of information that can be stored there and once a client comes on board, that information is stored and can now be considered by the central bank as compliant with the AMLA [anti-money laundering] or the KYC requirements.”
Another expert raised the question of how regulators look at the trust business in relation to this mooted development. “The Chinese wall exists so that you cannot share any information outside the trust,” she observed. “Other firms might not be certified to perform the client suitability assessment, for example, as anything that is on-boarded to a trust must be performed by trust personnel, except for the Unit Investment Trust Fund (UITF). This is therefore a major challenge.”
In need of a major overhaul?
And despite much talk, there remains considerable doubt as to whether this central depositary of data with the regulators will ever take place. This begs the question as to whether the wealth management industry in the Philippines needs a major overhaul.
“In the US, wealth management is not regulated by the central bank, but here it is, so even if we wanted to push our investments out there in the market we cannot because there are so many restrictions,” observed one expert. “As an example, even if we want to sell our funds nationwide, to access all the investors, we cannot do so because of all these restrictions that stipulate they can only be sold through our branches. Yes, online sales are possible, but again there are so many restrictions.”
Another guest directed this line of discussion towards the insurance sector. “Although I heard the central bank here is very conservative, very strict, very bureaucratic,” he commented, “I nevertheless think that the insurance regulator [the Insurance Commission] here is making a lot of effort to be more modern in its approach. There is a greater openness towards technology, for example, with proper regulation for e-commerce, even though there is not yet proper regulation on e-commerce in the banking sector.”
Lots of talk, not enough action
“I think we will be having this same discussion in 10 years on this topic,” one senior banker cautioned. “There is not a strong will or thrust here towards transparency. I really do think that it is the regulatory infrastructure that must evolve. The fact that there are three different regulators regulating the whole industry, the SEC, the BSP, and the Insurance Commission, has conspired to create silos. So, we can see that the Insurance Commission might do one thing, but it does not apply to the banks, or they have it all figured out conceptually, but they don’t know how to implement it. Or from a bank point of view we have to set up separate joint ventures and agencies in order to sell bancassurance products rather than just selling it in the branches.”
Everything, he argued, should therefore be far efficiently moving into being managed through one institution. “But,” he noted, “that simply is not happening, we are almost forced to act like conglomerates, with one entity for this and another for that. Hopefully 10 years from now these three bodies can make one decision that would improve everything, really make things fall into place, but for as long as each of them is operating separately it will stay the same because structurally, they treat us all separately.”
An expert reported that at the top of her wish-list is greater engagement with and by the regulators and for them to more open. “And perhaps just one regulator for our wealth management industry,” she added.
Another guest expressed dismay at how slow at the national/regulator levels the Philippines also is to embrace technology solutions, even though such initiatives are clearly possible, as witnessed by the national retina scanning that a country as vast as India is forging ahead with.
Diversification, but providers remain hampered
The discussion then focused more intently on products and services, with an attendee highlighting the predilection of Filipinos for term deposits, fixed income, and credit. “So many people here still park their surplus cash in time deposits,” they noted, “so will there be a trend towards greater diversification of investment products?”
One banker called for more derivatives, for example options that could be used to protect equity positions, to minimise volatility and risk. “Being open to having those products available and allowing fund managers to maximise returns will go a long way,” he observed. “There are things that are missing I think that actually can help, the regulators have to be more open to those things.”
There are nevertheless certain clear avenues for investors to buy more product. The SEC’s qualified buyers programme is one mechanism whereby investors are allowed access to a greater product range. This requires 10 million Pesos invested in registered securities and a net worth of at least 30 million Pesos. And there is also the trust vehicle, regulated by the central bank, that allows leeway for wider investment in global products through a trust vehicle.
A guest turned the spotlight on the need for successful initiatives to create and enhance digital platforms that would help the whole industry to come on board and then reach out to the mass market to help them buy funds online.
“We would love for the whole industry to actually come into the platform and reach clients and reach them as quickly as what we are offering,” she observed, “with subscribers able to buy as low as USD50 into one fund. The intention is to offer variety so the funds on offer should not only be our funds, the clients should have choice. The platform we work with is actually the digital side of it, they are the ones who open the door to be able to get us into that channel, it is really intended to be pure digital channel self-service, so the customer does not interact with anyone from our firm, they read about the research, anything that is fed to them through the digital portal.”
Additionally, she explained that her firm wants to be able to service that element of the client’s needs that will complement what the banks already offer. “So,” she elucidated, “if there is a portion of the client’s funds for example that they wish to be actively managed, where the decision making will largely rely on us [as an asset management firm] we can do that and that can be complemented by individual funds that they can buy from the other banks.” She then reported that the project so far is yielding positive results and gaining increasing traction with the end clients.
“From our viewpoint,” said a senior representative from a leading local bank, “we see that a lot of people think about digitalisation as establishing an app, creating a foxy website, making it mobile friendly, but for us, digitalisation really is the efficiency of the back office and the middle office.”
Insurance: a clear track but with hurdles
The discussion returned to insurance, with one guest who represents a European company highlighting developments his firm is making with a pure bancassurance model, working with a universal bank in the Philippines. “We are now going into one of our typical setups with multichannel distribution,” he reported, “and of course, we are trying to digitise our business model and we are building platforms. We cannot directly sell life insurance, that obviously is not going to be allowed, at least not in the next five to 10 years I would say.”
He added that the health insurance arena is an area for major investment in the Philippines. “Building a platform to allow for example millennials to purchase simple health products direct online is important. We are now engaged with the right partner here to build an open platform and to really grow this insurance business, not just for our company, but for the market as a whole.”
Nevertheless, he conceded that there are numerous challenges. “There is immense bureaucracy here,” he observed. “There is a widespread lack of financial literacy. There is a very small market for which to address sophisticated products, but for most people you need to think only about very simple products, you need to make sure those products are fully understood, and totally transparent. Accordingly, simplification is one of the keywords for this industry.”
Inclusiveness and financial literacy
He explained further that while there is a general mission to improve financial literacy and thereby boost the market of the future via greater inclusiveness of the rest of the population, the core of the business remains the top roughly one million people. “That is where we have to focus and where we are trying to sell a very diverse product portfolio,” he added.
“In general,” he continued, “there is amazing potential here, but the clients in a few years from now will not be purchasing from the traditional model necessarily, perhaps not from the banks, or asset manager, or even the insurance company. Instead, they would more likely go to some sort of well-known platform which they are perhaps using for totally different purposes. That is the point through which they will access, that is where we can create interest in our products. In short, you need to build ecosystems, otherwise these people will not be coming to you as the population here is so young, they will be entirely digital in the future. It is the same globally. So, for us, the story is growth, and adapting to the market needs.”
Onshore has far fewer attractions
The conversation then moved on to focus on the appeal of onshore versus offshore, and the potential for attracting overseas money back to the country. “Number one,” said a senior banker, “you have to have the same opportunity set as offered overseas, although of course, there will always be assets that will never come back because they really have to be there, such as property or other investments.”
And he explained that well-respected advice is vital, which in turn encourages the development of advisory and then discretionary management opportunities. “But with respect to the clients here actually getting to that point where they allow us to actually make investment decisions for them, I think that is going to happen, but much slower and over a longer time. For now, the crucial thing is to build the range of opportunities for the same investments as offshore.”
From deposits to investments
A banker from a wealth management firm give some insights into her motivations in the industry. “Why did I join this firm?” she asked rhetorically. “Precisely because they really wanted to carve out that segment that can be serviced by a wealth management team and target all the money held in deposits. It is a huge challenge to educate not just the salespeople but also the clients. For the more mature wealth management clients they are already well invested, for example through the trust business and they are largely savvy in terms of being diversified, being invested, beating inflation, and so forth. But our challenge is really to educate the other clients who currently have most of their money in deposits and move more of those funds into investments.”
The firm has had a lot of success, she noted, but there is far more to be done to move them towards what might be considered a mature wealth management portfolio.
“I would say about 50% of their portfolios remain in deposits,” she reported, “although with a very flat yield curve and with deposit rates giving you 6% for 30 days that is clearly a big part of the reason. Nevertheless, looking ahead I think as the markets change and as infrastructure changes as well, and we educate the clients towards diversifying and as we onboard more funds, you can actually change that behaviour. That is the challenge, really moving our clients to more sophisticated investments.”
“There is of course a cost to this education process,” said another guest. “I tell my senior management colleagues I need to keep going out and educating, but I tell them the revenue flows will be very low for now. Some 70% of the population today is still unbanked, they don’t have a bank account and so how can we talk about investments. First, they have to save and then they think about investments.”
Accordingly, for now, the wealth management sector is fighting it out for the top category of wealth in the country, the top one plus million people, to try to compete in terms of service, in terms of product sophistication and so forth. And in this category, an estimated USD100 billion dollars of money that is offshore already is as things stand very unlikely to return. “The growth is therefore the younger and fast-growing population,” this guest concluded.
This naturally led to the accommodative demographics and some analysis of client categories.
“We conducted a survey of our client base and the majority of them, about 60% are aged 50 and above and the rest are below 50, with some 20% in their 30s and very few millennial clients,” reported one expert. “However, we have noticed that the trend for many of our clients in their 50s and who own businesses to be training their children up to actually take over and also embarking on succession planning. That’s why some of the children in the second generation who do belong to that age group are becoming more aware of investments and the need to be more diversified. So, I think while they do not yet really hold the purse strings, they are very important and influential people in directing the investments of their family wealth.”
Currently, the guest added, most of the older clients want a service whereby investments they make are booked by RMs and others, as the human factor is still very important for them. “They are as yet not very keen on booking their transactions themselves, they are very busy doing other things, they are not in the finance world, they want somebody be able to advise them, they want somebody to be able to do this all for them. So, they really rely on the human factor and therefore perhaps the way we can use technology and infrastructure is really to equip the wealth managers and RMs themselves, not necessarily the client.”
But for the younger generations, ease of use, the speed of access, and the simplicity of process are all essentials. “There are plenty of the younger generations,” an expert noted, “including those inheriting or building their own businesses, who are focused only on opportunities to invest easily through the right portals or apps. My theory is eventually five to 10 years from now all the banks, the central bank also, may even have their own app, and you might end up with 50 to 100 apps related to finance, and the main driver is which one would the customer pick for their particular investment. Accordingly, it is a question of which ones would be most popular. Right now, there are few apps and they are more unique, but eventually, the industry is going to catch up and everyone will need to differentiate.”
Looking ahead and expressing some of his hopes for the future, a local private banker said the value proposition is the key. “As we meet more clients, we appreciate that this industry is about more than just growing the wealth, it is also the transfer of wealth, so the conversations are shifting to the change of generations in terms of ownership of the businesses and the wealth. Clients tell us that we all offer the same products, same services, and we all tell them we offer the best execution, but they say their chief concern is to make sure that at the end of their lives the portfolio, the assets of their families are protected. So, we are looking for ways in which we develop that value proposition. As part of a universal bank, the group has the capability to handle all these facets.”
“Awareness,” said another guest, “and how we really promote awareness, is essential. We can all come out with different types of products but if clients really don’t have any knowledge on how to reach those products, how to understand those then nothing will happen.”
And another guest said that from the customer perspective a unified platform where they can see all their investments is valuable. “Right now, they said, “because of the way investments are sold, through treasury, wealth and trust, the customers could have three investments in three different banks and three departments that they need to talk to. They need a platform from which to see all their investments.”
Inclusiveness a key goal
“The BSP could help push financial inclusion goals by implementing real open architecture for distribution because currently the only way for customers to fully enjoy other products is by buying through firms affiliated with the banks, within the financial conglomerate. If the BSP were to open the distribution platform, that is actually consistent with protecting the customer’s right to product choice because currently the customers are limited with product choices, and obviously some of the players would feel constrained to offer what they have even though probably in their minds there are other better products that will be more suitable to their clients.”
“Those that are in wealth management, private banking and even trust, should really catch up and hone up on their skills and their capabilities to be able to properly explain to clients about certain products, certain nuances, certain setbacks or things to look to watch out for,” came another opinion.
“Yes, I think that we owe it to the clients, it is critical to the future success of wealth management,” agreed another banker.
Trust, transparency, and simplicity
Trust, transparency, and simplicity are some of the virtues that one guest said are vital for the industry to flourish. “Whoever wins will have those qualities,” he said. “Collaboration in driving financial literacy is also vital because sometimes it is not the bad behaviour of a financial institution to sell the wrong product, it is basically also the scant knowledge of the people who are not aware of the right products to purchase. Building financial literacy and simplifying the products will promote the major opportunity to see more and more customers to buy into wealth management.”
CEO for the Asia Pacific region Alexis Fosler closed the discussion with a word of thanks to Allfunds’ existing clients in the Philippines and acknowledged the challenges the industry faces in the country.
“We certainly hope that the industry will flourish and that some of the challenges we have heard expressed today are removed. Certainly, many of our fund houses clients want to be involved in the Philippines, they fully appreciate the value proposition, fully appreciate the partnerships that you in the industry can offer, so if the regulatory and other hurdles can be overcome then my wish for the future here would be nearer fulfilment.”
The market players and the regulators clearly have a desire to build the wealth management industry. Time will tell how fast the progress will be, as actions always speak louder than words.
More from Manoj Prajapati, Allfunds