Direct-to-consumer sales online and by mobile may be needed as asset managers adapt to changing consumer tastes in Asia, say Justin Ong and Armin Choksey of PwC.

A typical morning on Singapore’s metro system, the Mass Rapid Transit (MRT), sees carriages of commuters locked on to the screens of their mobiles and tablets, doing everything from reading the news to playing digital games. It’s a similar scene on trains and buses throughout the world, but Singapore is exceptional. A survey in 2015 by consultancy Deloitte found that Singapore had the highest penetration of smartphones in the world, with nine out of ten Singaporeans in the survey owning one.

However, while Singaporeans can do everything from book a taxi to order a pizza from their phones, it is rare that they use their mobiles to buy funds.

Why have asset managers generally failed to exploit mobile as a sales channel for investment products in Singapore? Because the banks still control most
fund distribution in Singapore and in Asia generally, say Justin Ong and Armin Choksey, who cover the asset management industry in Asia for consultancy PwC in Singapore.

“When it comes to digital technology, the asset management industry has been slow to move,” says Ong, who is asset and wealth management industry leader. “It’s a product of what the banks want. A model that gives asset managers more access to the end customer, why would banks to do that? It’s going to cannibalise their business.”

TREASURE
Of course, there has been one digital shake-up of the asset management sector in Asia. The Yue Bao service launched by Alipay, a unit of Chinese e-commerce giant Alibaba, shocked the world when it raised more than $90 billion in 2014 for its money market fund. Although Yue Bao has generally been seen as an experimental gesture aimed at improving the experience of existing Alibaba users, rather than a full-on assault on the asset management sector, Alibaba nevertheless proved the potential of using digital channels to raise money for investment products.

Given the success of Yue Bao, it is a little surprising that, two years on, so much fund distribution in Asia continues to happen through the traditional bank channels. The inertia may reflect the fact that asset management is still a relatively underdeveloped industry in the region. PwC estimates that investment funds represent between 6%-8% of GDP in the continent, far below the levels seen in Europe or the US. It is similar story across the savings and investment industries, with Ong pointing out that across the continent, “we are significantly under-pensioned”. Asian investors have yet to embrace funds in a big way, regardless of how they are sold.

That is changing, of course. As populations across Asia urbanise, become middle class and gain wealth, the appetite for funds and pensions is on the rise. 

However, despite rapid growth in Asian economies, fund distribution remains dominated by the traditional bank channels, as demonstrated by the relatively low take-up of passive investment products.

“Governments are promoting ETFs [exchange-traded funds] because they are seen as a good, low-cost investment product for savings and retirement,” says Ong. “Singapore and Hong Kong are moving towards that. But the distribution channel has to change. When we see adviser platforms coming in, that’s when ETF flows will grow. But, because the traditional distribution channel in Asia is banks, you won’t get growth. The banks don’t want to sell ETFs, they don’t have the right incentive.”

ROBO-ADVICE
ETFs and other passive investment funds are particularly associated with new distribution channels. Online fund platforms such as Nutmeg have placed passive funds at their core, reasoning, like the Hong Kong 

and Singapore governments, that they make good value for money. In contrast, the lack of interest from banks and independent financial advisers in selling ETFs is not hard to understand – the fees and therefore the commissions are lower.

The typical response of conventional asset managers to the online platforms is to argue that many investors do not want to deal with a ‘robo-adviser’. The claim is that investors value talking face-to-face with an adviser or wealth manager. There will still be a market for actively managed funds, say the traditional managers, and a market for old-fashioned financial advice.

But Choksey, who is director of asset management, assurance and advisory at PwC, believes Asian investors are only too ready to manage their own investments online, and may even prefer to deal directly with asset managers, via online channels, than to buy funds through advisers.

“Internet penetration is high in Asia,” he says. “And, in my experience, Asians prefer not to be approached by someone. They think, ‘Is this person trying to con me?’ They would rather find out the information themselves.”

Choksey says some asset managers are making progress in the digital technology sector in Asia. In India, for instance, investors can buy mutual fund units by sending a text message from their phone. Indeed, Choksey argues that asset managers should see new distribution models as an opportunity, not a threat. Where traditional financial advisers are challenged by the new distribution models, asset managers have a chance to develop direct relationships with their customers.

“The distribution landscape is shifting to be more D2C [direct-to-consumer],” he says. “In the next five years, every retail manager will look at buying or developing a robo-adviser. They will see they are losing out.”

PASSPORTS
It remains to be seen how rapidly asset managers can take advantage of digital channels to increase their sales. In fairness, many managers remain hampered in their pan-Asian growth strategies by the lack of harmonisation between Asia’s markets. A recent PwC report co-written by Ong and Choksey examines the various attempts 

to create an Asian passport for funds and finds there are still barriers to overcome.

The Asia Region Funds Passport (ARFP), for instance, one of the leading passporting schemes, has got bogged down in arguments over tax. Last year, the Singapore regulator opted out of the scheme, saying that a condition to treat all foreign and local funds equally with regard to tax had been dropped from the wording of the ARFP agreement. 

Unless there was a level playing field, Singapore would not participate, it said.

Choksey says the matter of equal tax treatment must be resolved or the project will fail. “It’s not only Singapore putting its foot down. Even if Singapore doesn’t take part
and ARFP launches, it will fail if that isn’t fixed.”

With so much going on in Asia’s asset management industry, participants in the industry will no doubt be locked to the screens of their mobiles and tablets for some time yet.

©2016 funds global asia