Bank Wealth Management Faces New Transformation Hurdles

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The asset management industry is currently navigating a complex landscape marked by transforming market conditions and shifting regulatory frameworksAs we approach 2024, a combination of declining deposit rates, a ten-year treasury yield hovering below 1.7%, and persistent fluctuations in the equities market have created a challenging environment characterized by "low interest rates, narrow spreads, asset scarcity, and high volatility." The implications of these challenges are profound, especially following the comprehensive transition towards net asset value (NAV) management across the industry

 During a recent forum, Gao Xiangyang, the president of ICBC Wealth Management, emphasized that in such an environment, the alignment between asset returns and liability costs for the wealth management sector is increasingly difficult to maintain

He remarked on the direct relationship between market volatility post-NAV reform and the resultant fluctuations in product net valuesThis reality poses significant challenges for wealth management firms seeking to meet client demands for stable low-risk investment returnsConsequently, he asserted the industry will inevitably undergo a "second transformation."

Several industry leaders echoed these sentiments, discussing the pressing need for strategic adaptationsThey proposed solutions that include shifting focus towards higher risk-rated products (R3, R4, R5), emphasizing passive index management, and enhancing international perspectives alongside digital capabilities to serve an aging population more effectively

Emerging Challenges Post-NAV Shift

The release of new asset management regulations in 2018 initiated a transformative era focused on NAV-oriented operations

Over the past six years, wealth management firms have sought to redefine their roles within the asset management ecosystem, aiming for a clean slate in response to evolving client demands"This year marks a significant period for the wealth management sector, with total assets surpassing 30 trillion yuan," remarked GaoAlthough the industry has faced various hurdles, including market volatility and client redemption phases, it is now witnessing accelerated growth and a redefined competitive landscape, largely aided by regulatory improvements aimed at fostering a healthier competitive environment

However, the prevailing conditions of "low rates and asset scarcity" have become more pronounced, further complicating the wealth management landscapeGao identified a "second transformation" as a collective challenge the industry must address moving forward



In discussions, Zhong Wenyue, president of China Merchants Bank Wealth Management, highlighted that a staggering 95% of the 30 trillion yuan in the wealth management sector is concentrated in low-risk (R1 and R2) products, reflecting the historical preferences of bank customersHowever, evolving market dynamics and regulatory changes have begun to challenge the sustainability of this reliance on high-yield, low-volatility strategies

 Zong further articulated that, with current asset yields declining—as evidenced by the elimination of manual interest compensation and downward pressure on non-standard asset yields—the traditional positioning of wealth management firms is now under significant strainA sweeping reevaluation of approaches is crucial

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Recently, the market witnessed a shift in approach as bank wealth management subsidiaries attracted attention with news of developing internal valuation models to combat NAV fluctuations and mitigate investor panicHowever, these methods sparked debate within the industry, leading to regulatory pushback against practices seen as contrary to holistic NAV requirements.

The long-term perspective on demographic shifts—particularly aging populations—presents both opportunities and challenges for the asset management sectorSong Funing, president of Bank of China Wealth Management, noted the potential for growth driven by changes in retirement policies and personal pension implementation, which can elevate the sector's overall size and scope

 Nonetheless, the interlinking of aging with persistently low interest rates poses dual challenges for wealth management firms, especially those primarily geared towards fixed-income allocations

“Our research across several developed nations indicates that the highest yields on ten-year treasuries often correlate with a population percentage over 65 years reaching 12%,” said SongIn 2023, the proportion of individuals over 65 in China hit 15.4%, with ten-year treasury yields falling below 2%. Serving elderly clients effectively will become essential for the future direction of wealth management

Paths to the "Second Transformation"

Moving into this next phase of transformation, the industry consensus indicates a need for optimized product strategies and enhanced client mix

"Currently, the product structure lacks balance, overly reliant on short-term, low-rated offerings through parent bank channelsA strategic pivot from being a singular product provider to a comprehensive service provider is essential," observed Gao

He elaborated that wealth management products must reassess tenure structures and risk ratings while increasing the proportion of mid- to long-term products, along with those offering payment rights, engaging in sourcing funds beyond established channels

 Critically, Gao emphasized the importance of developing a diversified product line directed towards R3, R4, and R5 investments"The capital once concentrated in low-risk segments must now begin reallocating to R3-level products," noted Zhong, with the R3 products taking center stage over the next three to five years



Zhong elaborated on the timeline for this necessary shift, explaining the gradual evolution required as asset management firms cultivate investor understanding and adapt to regulatory frameworks governing higher-risk investments

 The transition from R1 and R2 to R3 is urgent, with market forces necessitating a swift alignment across the industryGiven the regulatory landscape, wealth management firms are advised to embrace their distinct advantages in this area compared to other financial institutionsHowever, as the asset management sector grapples with these challenges, a collaborative effort is needed to expedite this transition across the board

 Xia Wangzhong, chairman of Huaxia Wealth Management, reiterated that enhancing capabilities in equity investments is paramount in this phase

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