New Wave of Retail Asset Management Business


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New Wave of Retail Asset Management Business

  1. 1. No. 129 May 1, 2008 New Wave of Retail Asset Management Business — From Private Banking to Sales at Bank Branches — Hiroyuki MIYAMOTO and Toshiyasu YONEMURA
  2. 2. NRI Papers No. 129 May 1, 2008 New Wave of Retail Asset Management Business — From Private Banking to Sales at Bank Branches — Hiroyuki MIYAMOTO and Toshiyasu YONEMURA I Factors behind Emergence of New Investors II Issues Facing Financial Institutions in Dealing with New Investors III Market Characteristics and Marketing Strategies by Financial Asset Segment IV Standardization of Private Banking Service for Affluent and Mass Affluent Business A gainst the recent trends of a growing number of baby boomers reaching retirement age, increasing numbers of inheritances and a rising number of entrepreneurs, the number of peo- ple who are classified as falling under the “affluent and mass affluent” segments where financial assets worth ¥50 million ~ ¥500 million are held has been increasing. In addition to enterprise owners who are targeted by financial institutions for private banking services, these people have a wide variety of occupations and have a strong “mass-like” characteristic. The number of people who have started investing at bank branches (both at bank branch coun- ters and through visits by banks’ sales representatives) and via online brokers has also been increasing. While these sales channels are regarded as important portals to asset management for novice investors, currently, financial institutions have not yet been ready to provide them with ade- quate services as they begin to accumulate experience in investment and want to be involved in asset management on a more extensive basis. Financial institutions should recognize that clients in each asset segment have different needs. Rather than dealing with these needs separately, financial institutions should develop standards based on the customized private banking services for high net worth individuals (HNWIs) and apply such standards to the affluent and mass affluent segments. For essential information on the affluent and the mass affluent as well as their families, and important points in approaching them, which we were not able to fully introduce in this paper due to limited space, please refer to the book entitled “Fuyuso Family (Affluent Families)” written by Hiroyuki Miyamoto and published by Toyo Keizai, Inc. in 2007. Copyright 2008 by Nomura Research Institute, Ltd. 1
  3. 3. NRI Papers No. 129 May 1, 2008 with their performance at foreign-affiliated financial I Factors behind Emergence institutions and female workers who were promoted to of New Investors managerial positions and want to be part of management while raising children. These new wealthy people of This paper uses the amount of net financial assets (refer- working age live in three major conurbations, Tokyo, ring to financial assets such as deposits and savings, Osaka and Nagoya (we call this group of people the equities, single-payment life and annuity insurance “new-generation affluent”). minus debts such as loans) owned by a household to Conversely, owners of real estate companies, owners define market segments. Specifically, we call a group of of enterprises and the self-employed outside the urban people who have ¥500 million or more the “high net areas have mostly been plagued with issues such as slug- worth individual (HNWI)” segment, ¥100 million or gish regional economies, a drop in real estate prices, and more and less than ¥500 million the “affluent” segment, difficulties in finding successors for their businesses. As ¥50 million or more and less than ¥100 million the such, a stagnant economy that has continued since 1990 “mass affluent” segment, ¥30 million or more and less has positioned many of them outside the affluent and than ¥50 million the “upper mass retail” segment, and HNWI segments. less than ¥30 million the “mass retail” segment. In this A shift from the old to new generation of people falling paper, we describe the trend of asset management in under the affluent and HNWI segments has led to a each segment, and the strategies of financial institutions change in the way of thinking and behavior of consump- to deploy intersegment businesses (Figure 1). tion and the management of financial assets. This change is explicitly seen in a rise of “financial literacy (referring 1 New-generation Affluent Segments to the ability to use knowledge and experience by learning Sequentially Emerging in Three Major asset management)” and increased use of the Internet. Conurbations For example, the new-generation affluent in the three major conurbations who have high financial literacy tend Since we entered the 21st century, major changes have to opt for investment trusts and foreign ETFs (exchange occurred in the circumstances surrounding wealthy peo- traded funds) for which the fee rate is low. In addition, ple in Japan. New types of wealthy people have started rather than relying on a single financial institution as a to make their appearance, one after another. Typical source of information for asset management, they collect examples are owners and chief executives of newly information by themselves via the Internet and try to use established enterprises operating Internet businesses, other financial institutions to solicit second opinions new types of professional workers who receive rewards (opinions asked of a third-party expert in reaching deci- for high levels of success and/or high income linked sions). Figure 1. Definitions and Size of Markets by Asset Segment Affluent and HNWI markets in 2005 ¥46 trillion HNWIs (52,000 households) Net financial assets ¥500 million ¥167 trillion Affluent (813,000 households) ¥100 million ¥182 trillion Mass affluent (2,804,000 households) ¥50 million ¥246 trillion Upper mass retail (7,019,000 households) ¥30 million ¥512 trillion Mass retail (38,315,000 households) Notes: (1)In the list of markets, the upper line indicates the amount of financial assets owned in the segment; the lower line indicates the number of households in the segment. (2)The figures for 2005 were based on the “National Tax Agency Annual Statistics Report 2004” published by the National Tax Agency, “Population Prospects 2004” and “National Survey of Family Income and Expenditures 2004” published by the Ministry of Internal Affairs and Communications and “2003 Survey of 10,000 Consumers” by Nomura Research Institute. (3)The net financial asset amount refers to the figure obtained by deducting debts such as loans from financial assets such as deposits and savings, equities, single-payment life and annuity insurance (excluding physical assets such as real estate). Source: Estimation by Nomura Research Institute New Wave of Retail Asset Management Business Copyright 2007 by Nomura Research Institute, Ltd. 2
  4. 4. NRI Papers No. 129 May 1, 2008 Because traditional Japanese financial institutions where securities companies offered the service of man- have long targeted elderly affluent people who are aging personal assets and banks provided loans to cor- generally emotional and passive as their chief clients, porations. they are not fully ready to serve the new-generation However, since December 1998, when financial affluent in the three major conurbations whose financial deregulation allowed banks to sell investment trusts and information technology (IT) literacy is high. directly to clients, banks have been increasing their share in the market of managing the personal assets of middle- 2 The New Generation Inherit Businesses tier enterprise owners as backed by strong relationships and Assets Owned by the Affluent and established through corporate transactions over many HNWIs years. Actually, an NRI Survey on Investors (497 respondents) conducted by Nomura Research Institute in Another major change in the shift from the old to new December 2006 revealed that as many as 70 percent of generation is the succession of businesses and assets chief executives, directors, self-employed people and owned by the affluent and HNWIs. Because most own- free-lance professionals have been using banks to man- ers of enterprises established during the post-war period age their assets. It is likely that the high loyalty of mid- have now reached the retirement age, we see increased dle-tier enterprise owners to banks constitutes the occurrences where businesses and assets are being taken strengths of banks in their asset management business. over or inherited by their children or grandchildren. (However, it is also true that there are owners who do In many cases, however, these children are salaried not want banks that provided loans for their businesses workers before their succession to such businesses and to manage their personal assets). assets, and generally fall under the mass retail or some- In light of this situation, securities companies are what upper segments in terms of their transactions with brushing up their expertise in asset management and financial institutions. Once they take over their parents’ their ability to submit persuasive proposals that have businesses and assets, however, they tend to manage been developed over many years and strengthening their their assets in a more active and logical manner than efforts to retain middle-tier enterprise owners. their parents did. Therefore, financial institutions that In the future, the market of middle-tier enterprise simply resorted to reliable relationships with the parents owners will become the main arena of competition are likely to lose their relationships with the children. between banks and securities companies in the asset In addition, because the generations of the children management business targeting individuals. and grandchildren often have a great deal of experience in living overseas by working or studying abroad, they 4 People Began Becoming More Deeply have little resistance to asset management in foreign Involved in Their Own Asset currencies and the acquisition of overseas real estate. Management Furthermore, people who have experienced highly con- venient financial services in Europe and/or the US will People who were not so enthusiastic about asset man- expect similar services from financial institutions in agement in the past have started to become more deeply Japan. involved in managing their own assets. For the Japanese financial institutions that have been This trend is evident in that an increasing number of firmly protected under the “convoy-fleet” system admin- people in their 50s and 60s have been participating in istered by the government, the children of the affluent seminars held by financial institutions to collect infor- and HNWIs as well as the new-generation affluent in the mation about, for example, the management of retire- three major conurbations will be tough clients. ment benefits and post-retirement lifestyle design. There have also been people in their 30s and 40s who use mag- 3 Banks and Securities Companies azines and websites to collect information about finan- Compete in Acquiring Middle-tier cial products and services in an attempt to better manage Enterprise Owners their assets. A background factor behind these moves is that they A change has also been occurring in the business that have “places” for asset management that are located manages the personal assets of middle-tier enterprise nearby. Unlike branches of securities companies that owners. While securities companies primarily conducted ordinary people feel awkward in visiting, new “places” this business in the past, the participation of banks in the for asset management that are familiar to many people market of asset management services triggered competi- have become commonly available. Such places include tion in acquiring clients. bank branches and post offices that people use on a daily From the perspective of financial institutions, mid- basis, and online trading that permits transactions at any dle-tier enterprise owners have two faces - in the capac- time and anywhere. In addition, the number of in-store ity of an individual and of a corporation. Therefore, bank branches has also been increasing such as branches separation has firmly been established in the past of Seven Bank and Aeon Bank, where people can have New Wave of Retail Asset Management Business Copyright 2008 by Nomura Research Institute, Ltd. 3
  5. 5. NRI Papers No. 129 May 1, 2008 access to financial information and can conduct transac- market. Traditional Japanese financial institutions have tions while enjoying grocery shopping. also had tough going in their efforts to expand their pri- In addition, the increase in the number of people who vate banking services. For example, in many cases, the are seriously interested in designing their own lifestyles private banking services provided by megabanks are by themselves without leaving such design to someone confined to those provided as part of relationship man- else has also contributed to an increase in the number of agement (RM) for enterprise owners and landlords with people who are more deeply involved in managing their whom banks have established relationships such as own assets. through providing business loans in the past. While trust In 2007, the issue of the management of pension banks and major securities companies do provide spe- records in Japan shook the entire nation, and caused peo- cific financial products and services to HNWIs, there are ple to distrust and have misgivings about the social secu- only a limited number of cases where they provide rity system. Now, almost no one feels secure about a advice covering all assets of HNWIs and go as far as pension scheme that is plagued with the structural prob- supporting them to resolve business and/or family prob- lems of a declining birth rate and improving longevity. lems. These misgivings have changed the mindset of people In the future, however, with a shift from the old to from “the government can take care of my post-retire- new generation occurring among the enterprise owners ment life” to “I have to look out for my own future and (who constitute the core of the HNWI segment in that of my family.” Such a change will direct people Japan), it is assumed that a greater emphasis will be towards lifestyle design and asset management based on placed on the liquidation of assets as well as on the man- their own initiative. agement of financial assets, laying the foundation for Because there is a wide selection of financial institu- generating greater needs for private banking services. tions including those that participated in this market If needs for private banking services increase in the from different industries, people having such awareness future, the key to their popularization in Japan is the will not be passive about the financial services they trend of “regulations on the scope of businesses (firewall receive. Rather, they will select a financial institution regulations)” that limit the areas of operations of banks, that can provide the most appropriate service for their securities companies, etc. needs. In Europe, since around World War I, the scheme of “universal banks” that permits a single financial institu- tion to provide all sorts of financial services has been II Issues Facing Financial allowed. This scheme means that a financial institution Institutions in Dealing with can provide collective solutions based on problems fac- ing the client. In Japan, however, because of firewall reg- New Investors ulations, a financial institution has no choice but to take a product-based approach in which a bank (firm) pro- 1 Private Banking Service Difficult to Gain poses only products and services that can be handled by Popularity in Japan the bank (firm). Discussions are now ongoing towards relaxing these Compared to the long history and accumulated expertise firewall regulations. In anticipation of these moves, that exists in Europe and the US, the private banking ser- financial institutions in Japan must be ahead of their vice targeting HNWIs in Japan is extremely weak. competitors in establishing their brand and client base In Japan, after many traditionally wealthy people had for private banking services. This is the major issue fac- been ruined because of dissolution of financial cliques ing financial institutions providing financial services in (zaibatsu) and farmland reform after World War II, the Japan. owners of enterprises that were established after the war have come to make up the majority of HNWIs. These 2 Single Investment Trust Products Are owners have had a greater interest in the expansion of Also Offered to the Affluent Segment their businesses than in the management of financial assets. While many factors behind the unsuccessful develop- Another factor behind the unsuccessful development ment of private banking services targeting HNWIs are of private banking service in Japan is that most assets attributable to client choice and the legal structure sur- owned by HNWIs have been accumulated in the form of rounding financial services, the development of financial real estate and/or equities of their own enterprises. services targeting the affluent segment made up of peo- Accordingly, this environment has not led to the genera- ple who own assets worth ¥100 million to ¥500 million tion of needs for managing financial assets. has been hindered due to lack of strategies on the part of Because of this situation, foreign-affiliated financial financial institutions. institutions providing private banking services have The number of people falling under the affluent seg- repeatedly entered and withdrawn from the Japanese ment has been steadily increasing. According to NRI’s New Wave of Retail Asset Management Business Copyright 2007 by Nomura Research Institute, Ltd. 4
  6. 6. NRI Papers No. 129 May 1, 2008 projections, the number of households belonging to the with this sales method: “while we have relatively many affluent segment was 720,000 in 2003, which rapidly assets, financial institutions unilaterally push the prod- rose to 813,000 in 2005. This rapid increase is consid- ucts that they want to sell.” ered largely attributable to increases in the prices of Financial institutions must quickly make a reversal equities and the expansion of income gaps. from the product-out strategy (a product-oriented sales Unlike the HNWI segment that mostly consists of approach) to the market-in strategy (an approach focus- business owners, the rapidly growing affluent segment is ing on market needs) to meet the needs of the affluent made up of people having a variety of jobs such as segment. This is another issue facing financial institu- physicians, professionals (certified pubic accountants, tions to efficiently deal with the rapidly growing affluent licensed tax accountants, lawyers, etc.) and salaried market. workers. Accordingly, it is difficult to distinguish them in appearance from people falling under the mass retail 3 Mass Affluent and Upper Mass Retail segment. In addition, affluent people having high finan- Segments Use Diverse “Places” for cial and IT literacy do not blindly accept the sales pro- Asset Management posals of representatives of financial institutions. Rather, they engage in online trades and/or use the Internet to In the market of the mass affluent and upper mass retail search for lower fees to purchase investment trusts, etc. segments involving financial assets worth ¥30 million to This means that the principal characteristic of mem- ¥100 million and which is the main arena of the sales of bers of the rapidly growing affluent segment is that they products for asset management such as investment trusts have profiles both as “wealthy people” from the per- and annuities, banks and securities companies are no spective that they have many assets and as “mass peo- longer separated in terms of the products handled. Based ple” from the perspective of their ways of thinking and on their needs, clients have begun to select banks and behavior. securities companies. For this affluent segment that has two faces, financial According to the previously mentioned NRI Survey institutions are conducting “sales of single products” on Investors, about half of the respondents who are using such as investment trusts or bonds. This method of sales asset management services provided by financial institu- sells financial products that are preselected based on tions use both banks and securities companies (Figure specific characteristics, and highlights such characteris- 2). Even if they started with banks for asset manage- tics in selling the products. ment, about half of them have eventually turned to both For example, investment trusts with monthly divi- banks and securities companies. The situation is the dends are sold to clients falling under the affluent and same when clients start with securities companies; they lower segments for the single reason that the dividend eventually use both. yield is higher than deposits and domestic bonds. How- These findings suggest that even if a bank or a ever, the affluent segment has started to feel dissatisfied securities company serves as the initial entry to asset Figure 2. Comparison of Financial Institutions Used when Starting Asset Management and Those Currently Used Financial institution at which asset management was started Financial institution currently used 27% Use only securities company (30%) Started at securities company (54%) 24% 1% 2% Started at securities company and currently use both bank and securities company (24%) Started at bank and currently use 3% (20%) both bank and securities company 20% Started at bank (46%) 20% Use only bank (21%) 3% N = 497 Do not use asset management service (5%) Notes: (1)The survey target consists of owners of capital-at-risk products (including some people who have investment experience but do not currently own capital-at-risk products). (2)The questionnaires were sent and collected via postal mail. Source: Nomura Research Institute, “NRI Survey on Investors,” December 2006. New Wave of Retail Asset Management Business Copyright 2008 by Nomura Research Institute, Ltd. 5
  7. 7. NRI Papers No. 129 May 1, 2008 management, neither can continue to retain the client ing methods) and lower fees by primarily targeting exclusively. investors who had abundant experience in face-to-face From the perspective of clients, bank branches are investment and who invested according to their own located nearby and people often visit them for a variety decisions (such investors are called innovators and early of daily transactions. Bank branches are also convenient adopters) (Figure 3). for depositing and withdrawing money. Another advan- However, novice investors who started asset manage- tage of banks is that those who have already had transac- ment after conquering their hesitations in and after the tions with banks such as deposits and housing loans in 2005 investment boom when market prices rapidly the past feel secure in starting asset management there. increased are those who have a greater sense of anxiety Accordingly, the share of banks as the “places” for start- about asset management (they are called followers) than ing asset management transactions has been increasing. that of existing investors. The number of such investors However, while banks have reached almost the same has recently been increasing. This trend is also apparent level as that of securities companies in terms of provid- in the NRI Survey on People Having No Investment ing explanations and presenting sales proposals, banks Experience (330 respondents) conducted in December are said to be inadequate in terms of after-sales follow- 2006. About 40 percent of such respondents who are up services. This leads people who started at banks for interested in asset management selected “I want to con- asset management to use both banks and securities com- sult with an expert.” panies when they want to be involved in asset manage- What financial institutions are required to do for these ment on a more extensive basis or when equity market novice investors (most of whom are followers) is to pro- prices fall such as being triggered by the US subprime vide opportunities for them to feel free to talk about loan problem. asset management and to get straightforward answers to On the other hand, among those who started at securi- their questions. For instance, with the catchphrase of ties companies for asset management, some people have “please give us five minutes,” Shinsei Bank has been been switching to use both banks and securities compa- explaining the need for a long-span asset plan and diver- nies by considering the convenience of settlement and sified investments in an easy-to-understand manner at unified management of financial transactions because bank branches and on its website. This is a good exam- similar products (investment trusts and annuities) as ple of an approach that focuses on beginners feeling those purchased at securities companies are available at anxious about investing. bank branches. In addition, to prevent novice investors from being These trends have led to the following two issues. overly confused in selecting investment products, finan- First, people falling under the mass affluent and upper cial institutions need to carefully consider and select the mass retail segments have particular preferences for the products to be included in their product lineup. Because “places” to go for asset management. Under the current many financial institutions handle more than 100 types situation, neither banks nor securities companies alone of investment trusts, clients are often puzzled about what can cover such needs. to purchase. Second, client preferences change with the accumula- A good example is the “Investment Trust Super Sta- tion of knowledge and experience in asset management. tion,” which is a website opened by Rakuten Securities Accordingly, the “place” where a client starts asset man- exclusively for the sale of investment trusts in November agement cannot always meet client preferences perma- 2007. On this site, clients can use “Naruhodo search” to nently. Financial institutions must fundamentally list only investment trusts that are suitable for them from reconsider their approaches to changes in client prefer- among more than 200 issues by answering six simple ences. questions. Financial institutions need to develop such functions and/or services that navigate clients who feel 4 Growing Number of Novice Investors anxious about investing. (Followers) Starting Online Trading In this section, we consider how financial institutions III Market Characteristics and can best deal with people who started investing during Marketing Strategies by the boom of securities trading via the Internet (online trading) in and after 2000. These people, who mostly are Financial Asset Segment in their 20s ~ 50s, are younger than traditional investors and primarily consist of people in the mass retail and In this chapter, consideration is given to future market- upper mass retail segments. ing strategies that financial institutions should adopt for At the initial stage, when online securities companies their asset management business in light of the emer- expanded their share, what was required of these securi- gence of new investors and the issues facing financial ties companies was to simply pursue the convenience of institutions as explained so far. In particular, emphasis is stock trades (access to the market, diversification of trad- placed on the approaches based on the characteristics New Wave of Retail Asset Management Business Copyright 2007 by Nomura Research Institute, Ltd. 6
  8. 8. NRI Papers No. 129 May 1, 2008 Figure 3. Changes in Users of Online Trading In the past In the future Followers • Unfamiliar with asset management Early adopters • Want to start investment through full consultation • With high information collection • After accumulating sufficient capability, use financial magazines and knowledge, want to make comparison sites investments based on own Innovators • Start investing with an online broker decision via the Internet that offers “lower fees” and “enhanced • Making investments based on their functions” own decision • Being attracted by “stock trades in small lots” and “low fees,” switched from face-to-face securities companies 2000 2005 2008 Time investment began/will begin (At present) and needs of each financial asset segment as well as on dents in the mass affluent segment) revealed that the the strategies that meet the needs commonly seen in ratio of corporate owners is 58 percent in the affluent multiple segments. segment and 44 percent in the mass affluent segment, both of which are lower than 78 percent in the HNWI 1 Business Support for HNWIs (Corporate segment. Owners) In place of corporate owners, the ratio of people who have a large income flow such as salaried executives First, the attributes of the HNWI segment are examined. and directors, physicians and professionals (they are According to the NRI Survey on the Affluent and called “flow rich”) and that of retired people who have HNWIs (90 HNWI respondents) conducted in March a small income flow (they are called “retirement rich”) 2007, 78 percent of HNWIs are owners of business are high. enterprises, medical institutions, religious organizations, Among the affluent and mass affluent segments, the etc. Accordingly, the HNWI segment has a common fac- “new-generation flow rich” who were born after World tor of corporate ownership. War II and who earn a yearly income of ¥50 million or A matter of primary concern to corporate owners is more are characterized by their ability to gather informa- the management of the corporation they own. Their con- tion by themselves and their high level of interest in new cerns are always directed towards financing their activi- products and services. Another of their characteristics is ties, expanding the scope of activities and successfully extensive experience in living overseas through work transferring their activities to the next generation. In assignments and/or studying abroad. addition, because most of the personal financial assets Because of these characteristics, they have a high held by the owners of listed enterprises consist of the interest (40%) in alternative investments such as hedge equities of their own enterprises, business growth funds, private equity funds and private/public structured directly affects personal asset management. bonds, and a high ownership ratio (75%) of products in This situation makes it important for financial institu- foreign currencies. These findings suggest that they are tions to provide information pertaining to clients’ busi- good target clients for asset management services. nesses, introduce appropriate human networks and Turning to the “retirement rich,” we find that they provide support for business succession and/or mergers have accumulated adequate assets to live average lives. and acquisitions (M&A). However, when we consider inflation, increased medical and nursing care costs, expenditures for hobbies and 2 Asset Management Proposal for the trips, support for children purchasing houses, and so on, “Flow Rich” and Lifestyle Design they need to increase or draw on their assets based on a Proposal for the “Retirement Rich” well-considered plan to enjoy comfortable lives after retirement. In this section, we look at the affluent and mass affluent With the improvement of average longevity and the segments. increase in the number of healthy seniors, the number of The NRI Survey on the Affluent and HNWIs (191 retirement rich people who require asset management respondents in the affluent segment and 84 respon- based on a well-planned lifestyle design will increase. New Wave of Retail Asset Management Business Copyright 2008 by Nomura Research Institute, Ltd. 7
  9. 9. NRI Papers No. 129 May 1, 2008 3 Targeting People in the Upper Mass financial products efficiently by using all available Retail Segment Who are Likely to Inherit sources, i.e., branches, the Internet and call centers. Assets Through these activities, financial institutions should be able to discover “future retirement rich” who are In the upper mass retail segment involving financial expected to step up into the mass affluent or higher seg- assets worth ¥30 million ~ ¥50 million, the ratio of ments during conversations with clients. corporate owners and flow rich is reduced. Instead, salaried workers and retired people account for most of 4 Formulation of Strategies Covering the people in this segment. According to the NRI Survey Multiple Segments on Investors and the NRI Survey on People Having No Investment Experience, mentioned in the previous In the previous sections, we have examined the charac- sections, although the executives and directors of teristics of and approaching methods for each segment. enterprises or organizations accounted for only 5 In this section, attention is paid to the needs that are percent, salaried workers and housewives accounted for common among multiple segments (Figure 4). 60 percent and retirees accounted for 11 percent. The first group that has common needs consists of However, even among the upper mass retail segment, corporate owners and new-generation flow rich in the people who are likely to succeed to financial assets by HNWI, affluent and mass affluent segments. Their com- inheritance or those who are expected to receive funds to mon needs include interest in business and global invest- purchase housing in the form of an inter vivos gift are ment. highly likely to step up from the upper mass retail seg- While the scale of financial assets and/or business dif- ment to the mass affluent or higher segments. These fers, the common factor among corporate owners and people are considered the “privileged working genera- new-generation flow rich is that financial institutions can tion (i.e., future retirement rich)” even among the upper build client trust by providing information and support mass retail segment. for their clients’ businesses. For asset management business for the upper mass Some private bankers provide advice to corporate retail segment as a whole, financial institutions have lim- owners in the HNWI segment through dedicated bank ited options and must rely on relatively simple financial advisers such as for fund raising for a corporation, busi- products such as the sales of investment trusts and bro- ness succession, business matching and/or M&A, and kerage services for stock trading. Rather than increasing introduce specialists in Japan and other countries. fee revenues by increasing the frequency of trades, While it is difficult to provide similar business support financial institutions should provide information and sell to corporate owners and new-generation flow rich in the Figure 4. Market Characteristics by Financial Asset Segment and Common Needs Retirement rich Common interest in business Corporate HNWIs owner ¥500 million Common interest in global investments Old-generation New-generation Corporate Affluent Retirement rich flow rich flow rich owner Common interest in lifestyle design to enjoy post-retirement lives ¥100 million Salaried Old-generation New-generation Corporate owners, Mass affluent Retirement rich workers flow rich flow rich self-employed ¥50 million Upper mass retail Privileged working generation Retirees Salaried workers Self-employed (future retirement rich) ¥30 million Mass retail Retirees Salaried workers Self-employed New Wave of Retail Asset Management Business Copyright 2007 by Nomura Research Institute, Ltd. 8
  10. 10. NRI Papers No. 129 May 1, 2008 Figure 5. Percentage of Assets in Foreign Currencies in Financial Asset Portfolios (%) 25 23 20 20 15 13 Average percentage of assets denominated in foreign currencies in portfolios 10 5 0 HNWIs New-generation flow Average of affluent (N = 90) rich in affluent and mass and mass affluent affluent segments segment (N = 57) (N = 273) Notes: (1)HNWIs refer to couples owning financial assets worth ¥500 million or more; affluent refers to those owning financial assets worth ¥100 million ~ ¥500 million; mass affluent refers to those owning financial assets worth ¥50 million ~ ¥100 million. (2)New-generation flow rich refers to those who were born in and after 1947 and who earn an annual income of ¥50 million or more per couple. (3)The questionnaires were sent and collected via postal mail. Source: Nomura Research Institute, “NRI Survey on the Affluent and HNWIs,” March 2007. affluent and mass affluent segments as that provided to use of asset management tools for standardizing the skills the HNWI segment, it is certainly possible to provide of representatives and for managing proposal histories. information through an assigned sales representative. In addition, the needs for global investments including products denominated in foreign currencies are com- IV Standardization of Private monly seen in the HNWI segment and the new-genera- Banking Service for Affluent tion flow rich. In this respect, the NRI Survey on the Affluent and HNWIs revealed that both HNWIs and the and Mass Affluent Business new-generation flow rich showed a higher percentage of assets denominated in foreign currencies in their finan- As stated in Chapter III, while there are differences in cial portfolios than the average of affluent and mass asset management needs due to the differing amount of affluent people (Figure 5). financial assets owned among the HNWI, affluent, mass Corporate owners and the new-generation flow rich affluent and upper mass retail segments, there are also have many common factors in such aspects: they have a needs that are common among multiple segments. positive attitude towards challenging new things; they Because people generally have the tendency of paying understand that investments involve risks; and they rec- attention to the lifestyle or consumption behavior of ognize that the Japanese economy has matured, which wealthier people, it is effective to adopt a strategy of par- requires global allocation of assets (asset allocation tially standardizing “order-made” private banking ser- through the diversification of investments in global prod- vices developed for HNWIs to create “pattern-made” ucts). As such, financial institutions can provide these services, which could be extensively offered to the afflu- clients with services involving global investments in a ent and lower segments. true sense. This is because financial institutions cannot make The second group that has common needs consists of profits if they offer order-made services to the affluent, the retirement rich in the mass affluent and higher seg- mass affluent and upper mass retail segments and, at the ments and the privileged working generation who are same time, because their needs cannot be met if financial candidates for joining the retirement rich. The common institutions offer the same product packages as those needs of this group are those for lifestyle design. developed for the mass retail segment. What is important in approaching this group is to pro- The following sections show specific examples of vide advice for asset management based on lifestyle standardizing private banking services and offering such design as determined by the purposes of their lives and services to the affluent and lower segments (Table 1). how to live a post-retirement life such as presenting esti- mates for the funds required to cover anticipated expen- 1 Standardization for Asset Management ditures and proposals for increasing and/or utilizing their Service—SMA, Fund Wrap assets to finance such expenditures. When a financial institution provides this service to the Asset management service refers to “service to effi- mass affluent or lower segments, the key to success is the ciently manage and preserve assets by managing assets New Wave of Retail Asset Management Business Copyright 2008 by Nomura Research Institute, Ltd. 9
  11. 11. NRI Papers No. 129 May 1, 2008 Table 1. Examples of Product Lineups Meeting Needs Commonly Seen in Multiple Segments Mass affluent and upper mass HNWIs Affluent retail (financial assets worth ¥500 million Affluent (financial assets worth (financial assets worth ¥30 million or more) ¥100 million ~ ¥500 million) ~ ¥100 million) • Individual asset management • SMA • Fund wrap Asset management service service • Proposal for lifestyle design and • Balanced investment trusts (want to manage assets on a • Family office service management by using asset • Proposal for lifestyle design and consolidated basis) management tools management by using asset management tools • Dividends from equities owned • Variable annuities • Variable annuities • Real estate for rent and • Monthly return funds • Monthly return funds Securing regular income investment purposes (in Japan • Real estate for rent and (want to secure cash flow to and other countries) investment purposes (in Japan) enjoy life) • Loans on the security of equities of own enterprise • Management by foreign financial • Equities and investment trusts • Investment trusts involving newly institutions involving newly emerging emerging countries Alternative investment • Private structured bonds countries • Public structured bonds (want to enjoy the pleasure of • Hedge funds, private equity funds • Private structured bonds • Hedge funds (FOF) investing) • Public structured bonds • Hedge funds (FOF) Asset management consultation • Private seminars • Branches exclusively for private • Seminars service banking services • Consultation booths (want to thoroughly discuss asset management by acquiring reliable information) Notes: FOF = fund of funds (a single investment trust covering multiple investment trusts), SMA = separately managed account (an consolidated asset management account for each investor) on a consolidated basis.” From their perspective, clients Fund wrap programs that confine the scope of can efficiently manage their assets through the consoli- investment to investment trusts are now being offered dated management of assets without excessively owning for a minimum asset amount of around ¥5 ~ 10 million. liquid assets such as deposits. Another advantage of con- This service is composed of more standardized solidated asset management is being able to respond functions than SMA and meets the asset management effectively to price fluctuation risks. While the type and needs of the mass affluent and upper mass retail size of assets owned differ depending on each asset seg- segments. ment, the needs for efficient asset management through In the future, more enhanced comprehensive advice consolidated management are commonly seen among service will be offered that will cover items as far as the upper mass retail and higher segments. lifestyle design created using the asset management To manage an enormous volume of assets on a consol- tools to calculate a target asset amount and a recom- idated basis, asset management companies or financial mended portfolio based on a simulation of income and institutions offer asset management service to HNWIs. expenditures during post-retirement life. Recently, in some cases, a “Family Office Service,” where a dedicated team of experts manages and resolves 2 Standardization for Securing Income a client’s family problems has also been offered to —Monthly Distribution Funds, Annuities HNWIs. As a service equivalent to consolidated asset manage- The need for a secure cash flow is strong even among ment, the wrap account (separately managed account: HNWIs who own financial assets of ¥500 million or SMA) that is a discretionary account allowing financial more. In particular, because the tendency of holding institutions to determine the timing of buying or selling assets in the form of equities of their own enterprises securities is being offered to the affluent and lower seg- and/or real estate has continued, HNWIs in Japan have a ments. Under SMAs requiring a minimum asset amount problem in terms of asset liquidity. Therefore, as a of around ¥20 ~ 30 million, extensive investments are means of securing cash flow, HNWIs receive dividends generally made in Japanese and foreign equities, invest- from the equities owned and income from real estate ment trusts and bonds. While an SMA is not completely owned in Japan and other countries for rent and for other order-made, this service can be considered as corre- investment purposes, and use loans secured by the equi- sponding to private banking service. ties of their own enterprises. New Wave of Retail Asset Management Business Copyright 2007 by Nomura Research Institute, Ltd. 10
  12. 12. NRI Papers No. 129 May 1, 2008 The needs for securing income on a regular basis are 4 Standardization for Services at Branches more significant in the affluent and lower segments than —Branches and Consultation Booths in the HNWI segment. These needs increase the popu- Dedicated for the Affluent Segment larity of funds distributed monthly and annuities among the affluent and mass affluent segments as a means of People who fall under the upper mass retail and higher supplementing social security pensions. segments commonly have the need of acquiring reliable These trends suggest that the common needs among information from financial institutions and thoroughly the upper mass retail and higher segments are regularly discussing asset management. receiving income generated from assets owned and/or For HNWI clients, financial institutions provide cus- stably drawing on the assets owned. tomized information services through opportunities such In the future, product groups covering multiple seg- as a private seminar held by an analyst. At the private ments that will secure regular income are likely to be seminar, they can discuss only what they are interested developed. For example, in the area of loans on the secu- in with specialists. rity of owned assets and annuities, products reflecting Because it is not profitable to offer private seminars to the characteristics and needs of each segment will be each person falling under the affluent and lower seg- developed. ments, open seminars are held and consultation booths are provided at branches. In the past, high counters were 3 Standardization for Alternative generally installed in bank branches and securities com- Investments—Publicly Offered Structured pany offices for clerical transactions. However, recently, Bonds, Fund of Hedge Funds we have seen the installation of partitioned consultation booths, private rooms and seminar rooms at such “Want to make an investment that makes me feel the true branches for everyday use. pleasure of investing” is also a need that is commonly Furthermore, the number of financial institutions that seen no matter what the segment. have opened branches exclusively for private banking Among HNWIs, the use of foreign financial institu- services has also been increasing. It is said that people tions for managing part of their assets and privately who actually use these branches are mostly those in the placed structured bonds for which they can set invest- affluent segment, and there are only a limited number of ment targets, timing and redemption conditions as they occasions where HNWIs use these branches. Accord- prefer are popular. This popularity stems not only from ingly, branches exclusively for private banking services their wishes to hedge against risk in their portfolios (risk can be regarded as a good example of the standardiza- avoidance) but also from a strong touch of “enjoying the tion of private banking services that skillfully uses the true fun of investing.” mindset of affluent people who yearn for HNWI status. With investment targets being expanded to those in other countries, financial products that enable enjoying 5 Which Segment to Target Holds the Key the true fun of investing are now available to the affluent to Success in Standardization Strategy and lower segments in a variety of formats. For example, the investment trusts that include equi- The above sections introduced the pioneering cases of ties and bonds of newly emerging countries and the fund “standardization strategy” in which standards are devel- of funds (FOF; referring to a single investment trust oped for private banking services aimed at HNWIs and made up of multiple investment trusts) are now avail- are now being applied to the affluent and lower seg- able, making it possible for the affluent and lower seg- ments. What is most important in evolving this strategy ments to invest in markets and financial products, which is to precisely recognize the common needs among mul- were difficult for these segments to access in the past. tiple segments. Unlike privately placed structured bonds, investors Furthermore, which segment to target determines the cannot set investment timing and redemption conditions success or failure of the standardization strategy. for publicly offered structured bonds. Nevertheless, First, the standardization strategy covering business because a variety of settings are possible such as for owners and entrepreneurs must target the new-genera- redemption conditions and yields, investors can have the tion flow rich in the affluent segment. Being highly sen- pleasure of investing that they cannot experience with sitive and having high financial and IT literacy, they other financial products. require a high level of products and services from finan- However, careful consideration must be given to the cial institutions. If financial institutions can be success- protection of users for the standardization of alternative ful in meeting the standards they require, this will open investments. This is because alternative investments the way towards the evolution of services in a market other than those placed for the purpose of hedging risks having even a greater size, i.e., the new-generation flow present a higher possibility of losing funds for future liv- rich in the mass affluent segment. ing if an investment fails than that in the HNWI seg- Second, target clients of the standardization strategy ment. for asset management and lifestyle design are wealthy New Wave of Retail Asset Management Business Copyright 2008 by Nomura Research Institute, Ltd. 11
  13. 13. NRI Papers No. 129 May 1, 2008 retirees (mostly in the mass affluent segment) primarily financial institutions are expected to rebuild their busi- consisting of baby boomers. The expertise developed nesses with clients as their principal focus. and accumulated in dealing with their needs for lifestyle design will contribute to establishing a competitive edge in acquiring the privileged working generation who are Hiroyuki MIYAMOTO is a senior consultant and manager to inherit the assets of the baby boomers. of the Financial Business Consulting Department of NRI. His specialties include marketing strategies, CRM, management Rather than positioning business that targets the afflu- consulting in the banking, securities and insurance industries ent and HNWIs as separate activities, financial institu- and business strategies for private banking and the affluent. tions should make the utmost use of the ripple effects of Toshiyasu YONEMURA is a consultant of the Financial such business to other segments to generate inter-busi- Business Consulting Department of NRI. His specialties ness synergy effects. Eventually, these efforts will include business strategies in the banking, securities, life and improve the quality of Japanese financial services. non-life insurance and credit card industries, strategies for Now that recovery from the economic recession that sales at bank branches, business reforms and consumer sur- lasted since 1990 has temporarily been brought to a halt, veys. New Wave of Retail Asset Management Business Copyright 2007 by Nomura Research Institute, Ltd. 12
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