Singapore is expected to benefit as regulators clamp down on the flight of capital to other offshore financial centres, such as Switzerland, Luxembourg and the Caribbean. Stefanie Eschenbacher finds the growing number of wealthy people in emerging Asia may be an even more important growth driver.
Already the fastest-growing wealth centre in the world, Singapore may become the largest offshore private banking market by the end of this decade.
Singapore’s assets under management have grown by a staggering 1,100% in little over a decade, to $550 billion, a report, Asian Cities Wealth Book 2012, by data provider Timetric shows.
Hong Kong, in second place with $250 billion of assets under management, trails far behind Singapore in the list of Asian wealth centres.
If current growth patterns continue, Singapore will have overtaken Switzerland by 2020. Percentage-wise, the sun-drenched Asian city-state is home to more millionaires than any other place in the world.
Singapore is expected to benefit as regulators clamp down on the flight of capital to offshore financial centres such as Switzerland, Luxembourg and the Caribbean.
Ekkehard J Wiek, managing partner at W&M Wealth Managers (Asia), says Switzerland has “certainly lost some of its reputation” in recent months. “We will see changes in Singapore, as well as elsewhere in Asia, but not to the same extent as in Europe,” he says. “Asia will not be untouchable, but will be better positioned.”
W&M Wealth Managers (Asia) services mostly European clients, and Wiek says they increasingly want to have at least a portion of their assets in Asia.
“Many [of our clients] have so many assets in European countries that they want to diversify,” he says, adding that while many European banks needed bail-outs, no Asian banks needed rescuing. Wiek says his clients “see the potential” of Asia and want to invest there.
“There has been a flow of funds to Singapore and Hong Kong as a result of what is happening in Europe,” says Michael A Olesnicky, partner at law firm Baker & McKenzie in Hong Kong.
“People still think that they get secrecy, but if they get any benefit it is only short-term. Singapore and Hong Kong do not wish to be perceived as tax havens.”
Tax avoidance and tax evasion feature high on the agenda of most countries, but the US, the UK, Germany, France, Italy and Australia are at the forefront.
The financial crisis has accelerated this trend. Debt-ridden governments have found it hard to increase tax rates for the middle and working classses, and have now started to tackle those that are perceived to not pay their share.
“As far as tax is concerned, privacy is dead,” Olesnicky says. “Taxpayers can argue that they want to keep things private, but the result is that they have to pay their home rates of tax.”
Baker & McKenzie in Hong Kong and Singapore, but also elsewhere in the world, are receiving more enquiries about “how to structure things properly”, he adds.
“Historically, when countries start up as an investment target, they start by offering tax benefits to get investors in,” Olesnicky says.
Once governments realise investor money is flowing in, they toughen up. In Europe and the US, pressure comes from the public. This may also happen in Hong Kong and Singapore, where the gap between rich and poor is rising rapidly.
Singapore, according to a report published in 2009 by the UN, had a Gini coefficient of 42.5. Among the countries with high human development, Singapore is exceeded only by Hong Kong, which has a Gini coefficient of 43.4.
All countries will eventually have to bend to political pressures from others and Olesnicky says on a level playing field they will have to compete on issues other than low taxes and banking secrecy.
Countries are already substantially changing their strategies in order to comply with guidelines set by the Organisation for Economic Co-operation and Development Another, perhaps more significant, trend is that wealth in the Asia Pacific region is growing faster than elsewhere.
Although the number of high-net-worth individuals worldwide declined by 0.3% from the onset of the financial crisis in 2007 until 2011, Timetric says the number for the Asia Pacific region increased by 29% to 2.6 million over the same time. Their wealth grew by 30% to $10.6 trillion.
Meanwhile, the number of ultra-high-net-worth individuals rose by 31% to more than 32,800. This growth rate is forecast to double between 2011 and 2016.
“New money is more dynamically created in Asia,” Wiek says. “It is only natural that this is also kept in Asia.”
Singapore-based Hon Cheung, regional director, Asia, official institutions group at State treet Global Advisors, says the greater affluence in Asia, combined with new banking and tax laws in Europe, makes Singapore and Hong Kong a prime destination for wealth.
“In a global financial crisis environment, where there are concerns about taxes and banking secrecy, the Asian economies are looking attractive, particularly for Asian investors,” he adds.
The governments of Singapore and Hong Kong impose a flat tax rate, where a pre-determined rate is levied on income and profits.
They do, however, not tax capital gains, dividends, interest and, if properly structured, royalties. Singapore has tax exemptions to ensure there is no taxation on offshore wealth.
Defending these tax policies, Cheung says the government’s view should not be penalised. Instead, low tax rates should act as an incentive for other economies to create a level playing field.
“Rather than criticising Asia for having such a well-managed structure, other countries should see what they can improve,” he says. “This should add an incentive for other economies to also create a level playing field.”
Cheung adds that tax evasion, or tax arbitrage, is not something the government of Singapore would want to encourage because it has to place reputation above everything.
“The most important thing is reputation, and we do not achieve this through shortcuts,” he says. “Reputation is the lifeblood of Singapore’s sustainable development.”
As of July 1, laundering money from tax offences will become a criminal offence in Singapore.
The Monetary Authority of Singapore has listed a broad range of serious tax crimes as money laundering offences, which it plans to tackle through tougher laws and strengthening existing standards.
This move is as much about preserving its reputation as a fast-growing financial centre as it is about averting current (and future) pressure from other countries. “Once you possess wealth, you begin to be concerned about where to put it,” Cheung says, adding that the concern for many is not so much about how to grow wealth but more about how to protect it.
Dawn Quek, senior associate at Baker & McKenzie.Wong & Leow, in Singapore, says predictability and political stability are significant factors in this part of the world. While she says Hong Kong has been successful because it is a gateway to China, Singapore has more of an international focus. But, above all, people trust the system.
“Singapore does have an advantage over Hong Kong because it is perceived to have a more independent government.” Quek says. “Investors will always take political risk and access to properly regulated investments into consideration.”
Hong Kong residents have made no secret of the fact that China’s role is increasingly unpopular. Thousands have marched through the streets, voicing concerns over the rising gap between rich and poor, and Beijing’s growing influence.
One survey by the University of Hong Kong shows that mistrust towards the leadership in Beijing is at 37%, the highest since the transfer of sovereignty from the UK to China in 1997.
Quek says Singapore’s political stability makes it an attractive destination for other countries as well.
A report by Fitch Ratings, Asset Management in East Asia: Growth Shifting to Onshore Markets, shows Indonesia, Malaysia and Thailand have seen double-digit annualised growth rates in assets under management over the past five years.
Knight Frank’s Wealth Report shows Myanmar, Indonesia and Mongolia lead the way when it comes to growth in the numbers of high-net-worth individuals.
Quek says Singapore is no longer just a place where people set up bank accounts, but increasingly also one to hold operating business and succession business structures.
Much of the wealth that is flowing into Singapore is first or second generation wealth, both corporate and private. It is a complicated process to divide wealth among family members.
“The planning for each type of asset is different,” Quek says.
Apart from cash and other liquid investments, their wealth often encompasses assets as diverse as real estate, gold, boats, art collections, fine wine and other luxury items.
Succession planning is one of the main services in demand, with the trust structure becoming more important as a result. Quek highlights that splitting up a family business is particularly challenging.
In a widely publicised family feud, billionaire brothers Mukesh and Anil Ambani have spent more than a decade fighting over the empire built by their father Dhirubhai Ambani, the Indian tycoon, who died in 2002 leaving no will.
Wiek says the fact that many Asians have earned their money through their own or their parents’ business, determines how wealth management business is done.
“We still get people who are owners, people who earned money through an entrepreneurial background,” she says. “They are not used to third parties doing the job.”
Once first and second generation Asians start inheriting their parents’ wealth, Wiek says the services wealth managers provide will start to look more similar to those in Europe and the US.
What differentiates wealth management in Asia from that in Europe, Wiek says, is that Europeans are used to obtaining advice and management of their overall portfolio while Asians are more used to just brokerage services.
They are also more used to paying brokerage and trading fees, rather than consultancy fees.
Asia’s wealth management sector is growing and maturing, but asset allocation is becoming more complex, making it increasingly difficult to manage portfolios efficiently.
Those who have followed Singapore’s development from a sleepy backwater village with a seedy waterfront to the region’s largest wealth centre, such as Timetric, say no single institution can meet the increasingly complex needs of high-net-worth individuals.
They remain constrained by limited resources, a lack of experience, and regulatory restrictions.
Philip Chong, head of strategy and business development, at Deutsche Asset & Wealth Management, says in recent years there has been a shift away from higher risk category assets.
Clients increasingly ask for fixed income, cash products and exchange-traded funds (ETFs). “Clients have become more risk averse and fee levels are always an important consideration when making their investment choice,” he says.
Hon Cheung, regional director for Asia, official institutions group at State Street Global Advisors, says ETFs and other low-cost investments have emerged as an important category in terms of asset allocation.
Although Chong concedes that wealth managers earn lower fees from ETFs, he says client needs are what ultimately drives advice. Questions about fees, he adds, are what they naturally ask.
Emerging market debt and other higher-yielding products have also been in demand, Cheung says, in addition to real estate investment trusts.
In recent years, Singapore hit the Islamic finance scene just as it was taking off – most notably in Malaysia and Indonesia.
Given its location, this strategy came as no surprise. “Singapore is surrounded by countries where Islamic finance is growing and, in many ways, it is also looking to be a gateway to the Gulf and India,” Cheung adds.
Singapore even has its own freeport, the Singapore FreePort. Located near Changi Airport, it is a state-of-the-art facility to store and trade collections and valuables.
Supported by the Singapore Economic Development Board, it claims to be the largest freeport dedicated to the storage of fine art and high-value collectibles in the world, and the first in Asia.
While the wealth management industry in Asia is growing rapidly, particularly in Singapore and Hong Kong, Chong says so is competition.
Local players, he adds, are stepping up their efforts to compete with the larger, established wealth managers.
One of the larger deals in the region was when ING Asia Private Bank was acquired by OCBC Bank in early 2010, with the combined banking businesses subsequently branded as Bank of Singapore.
Singapore-based DBS Bank, which was established in 1968 as the development bank of Singapore, expanded its wealth franchise in recent years and pledged to take “private banking in Asia to a new level”.
While boutique wealth mangers like W&M Wealth Managers (Asia) feel increased competition from both local and international players, says Wiek, not all have been successful.
Both Wiek and Chong insist that a strong, global brand is key to success.
“Western banks and financial institutions are always thinking that because there is a lot of business around, they will be successful here,” says Wiek. “We are already seeing some of them leaving.”
©2013 funds global asia