This article first appeared in Wealth, The Edge Malaysia Weekly on December 28, 2020 - January 3, 2021

The Covid-19 pandemic is a watershed event that has ended more than a decade of strong growth for the wealth management industry. It has also brought about market turmoil and a global recession, and wiped out billions of dollars from financial markets.

What will 2021 bring? The consensus view is that three major disruptive forces — technological advancements, demographic changes and slower economic growth — will converge and give rise to the next normal for the industry.

The fact is, rapid changes were already afoot prior to the pandemic. Technology, for instance, had allowed people to access wealth management products and services online without intermediaries. The emergence of a generation of young and tech-savvy investors further fuelled such a trend, forcing industry players to speed up their digitalisation plans.

There is also the prolonged low interest rate environment that has left millions of pensioners with little choice but to shift the money in their fixed deposits to fixed-income funds in the hope of having higher yields to sustain their retirement years.

To navigate these trends, fund houses, unit trust agencies and financial planning firms began to digitalise and innovate in recent years. In the next normal, there will be no room for laggards.

The biggest game changer for the industry this year, of course, has been Covid-19. As cities around the world went into lockdown, the demand for online products and services surged to unprecedented levels. The young, who had never invested before, flocked to the stock markets hoping to generate extra income. Then interest rates dived to record low levels, prompting a large number of investors to pull their money out of their fixed deposit accounts and put it in riskier assets for higher returns.

The change in Malaysia’s wealth management industry is said to be more dramatic than that of its peers in Southeast Asia, thanks to the democratisation of investing. The process has been accelerated due to the proliferation of robo-advisory firms, says Sani Hamid, director of economics and market strategy at independent financial advisory firm Financial Alliance Pte Ltd.

The first robo-advisory firm, Betterment, was founded in 2008 in the US and started receiving money from investors two years later. This idea was then propagated globally and landed on local shores in 2018 when StashAway Malaysia commenced operations in November. Suddenly, people could invest their money online with no minimum investment amount, no sales charge and an annual management fee of a mere 0.25%.

This was a far cry from what was offered by unit trust funds in the market. In general, most of them have a minimum investment amount of RM1,000, a sales charge of 3% to 6% and an annual management fee of 1% to 2%.

The continuous efforts of the Securities Commission Malaysia (SC) to liberalise the capital markets have lowered the bar for people who wish to start investing, says Danny Wong, CEO of Areca Capital Sdn Bhd. “Its impact on the industry is obvious as the man in the street can now invest online with a fraction of his savings.”

Since 2015, the SC has given its approval to 10 equity crowdfunding platforms to operate locally, allowing investors to invest in the equities of start-ups and private companies with as little as RM10. There are also 11 peer-to-peer (P2P) financing platforms currently in operation, and anyone can invest in P2P investment notes issued by micro, small and medium enterprises for as little as RM50.

Apart from StashAway Malaysia, there are other three local robo-advisory platforms — MYTHEO, Wahed Invest and Akru — that allow investors to put their money in exchange-traded funds with a minimum amount that is lower than RM100. Three licensed digital asset exchanges, namely Luno, Sinegy and Tokenize Malaysia, have also been approved by the SC to facilitate the trading of digital tokens, starting from as low as RM1.

Clement Chew, CEO of Apex Investment Services Bhd, says institutional wealth managers are leading the way, embracing technology even before the pandemic. For instance, the Employees Provident Fund (EPF) introduced the i-Invest initiative in August last year to allow its members to invest a part of their retirement money in unit trust funds with a 0% to 0.5% sales charge. “Such a move by EPF [the largest asset management firm in the country with about RM925 billion under management in 2019] has had a huge impact on the market.”

Local industry players who spoke to Wealth recall how the pandemic caught them by surprise at the beginning of the year. Like their global peers, Malaysian banks, fund houses, financial planning firms and unit trust agencies faced unprecedented business disruptions. They were struggling to switch all forms of communication online to secure new clients and service existing ones.

“It was challenging to go after new business, particularly during the Movement Control Order (MCO) period. Our business, through the agency force, ground to a halt,” says Apex’s Chew.

Industry players also found it a challenge to service their existing clients. “We have had to adjust to communicating digitally with our clients. It has been a big challenge for a service-focused industry like ours, where relationship managers are used to communicating with clients face to face,” says Daniel Brown, head of investments and product solutions at CGS-CIMB Securities Sdn Bhd’s private wealth division.

Brown says face-to-face meetups with clients had been the norm for decades. Unlike the fast-moving consumer goods industry, wealth management is more complex and it is easier to explain the various financial planning products in person than through a screen.

Constant engagements with clients are required to explain complex wealth management issues, market movements and investment strategies, says Sammeer Sharma, managing director and head of wealth management at Standard Chartered Bank Malaysia. This need becomes more pronounced when there is heightened market volatility and when interest rates are lowered by central banks, he continues. “Clients want clear information and advice quickly on how to navigate the new normal.”

Meanwhile, physical events for client engagements and branding purposes had to be cancelled, says Financial Alliance’s Sani. The financial planning firm had organised events in Malaysia from time to time but it all came to a halt during the MCO period and its subsequent iterations.

The firm also faced difficulties in transacting products such as insurance policies, which involve a lot of paperwork. “The buying and selling of unit trust funds have not been affected as we have been doing this for years through online platforms. The process just needs a bit of tweaking,” he says.

“However, insurance products are a bit of a challenge as they require pen and paper. The good thing is that insurance companies have been levelling up, allowing us to submit documents online.”

As the saying goes, every cloud has a silver lining. For fund managers, it is the lowering of interest rates — to a level last seen in 2004 — that has led to investors moving the bulk of their money out of fixed deposit accounts and into wealth management firms to chase higher returns.

Teng Chee Wai, managing director of Affin Hwang Asset Management Bhd, has seen fixed-income unit trust funds receive vast amounts of inflows this year from investors seeking higher yields. Meanwhile, Areca’s Wong has seen the size of technology and healthcare-related funds balloon since the start of the pandemic.

The increase in retail participation in the equity market is a major surprise to wealth managers. Apex’s Chew says about 211,000 stock brokerage accounts were opened in the first seven months of the year, representing a year-on-year rise of 125%. Of the new accounts opened during this period, 78% belong to investors aged 45 and below, he adds.

“We did not expect retail investors to come back in a big way like this. These numbers show a surge of interest among millennials looking to invest and build an alternative income source. With the growing awareness of investing, there is now a bigger market for wealth managers to address,” says Chew.

Also, various asset management and financial planning firms are quickly adapting to the next normal by embracing technology. Some are developing in-house digital platforms while others are investing in financial technology (fintech) start-ups.

As players quickly adapt to the convergence and acceleration of major trends, the wealth management industry is set to look different in 2021. Goal-based investment solutions will replace product-centred sales practices as the norm. Wealth management firms, including fund houses, will increasingly allow customers to build personalised portfolios online and invest in a basket of unit trust funds to achieve their longer-term financial goals.

For instance, BIMB Investment Management Bhd launched BEST Invest in June, its first online investment mobile app that allows users to invest as little as RM10 in BIMB unit trust funds with minimum sales charge. Meanwhile, Affin Hwang is preparing to launch a mobile app for users to invest in its unit trust funds via their smartphones.

Areca’s Wong says the firm has obtained a financial planning licence from the SC. The company’s sales force, previously comprising unit trust agents, has been transformed into a team of certified financial planners.

Areca now distributes a variety of unit trust funds to its clients, including those of other fund houses, through online and offline channels to meet their financial goals. “We can also recommend insurance policies. And we will be able to provide estate planning, will writing and trust services very soon to give our clients a comprehensive wealth management service,” says Wong.

Avinash Satwalekar, CEO and country head of Franklin Templeton Asset Management (M) Sdn Bhd, says it is natural for investors to be more sceptical about intermediaries who adopt a product-push sales tactic. “Investors are getting more knowledgeable about investments. With the information they get through the internet, they can make investment decisions at a similar level as institutional investors. Naturally, they want to talk about solutions and be asked questions like, ‘What are your financial goals and what are you trying to achieve?’”

In the new paradigm, wealth management firms will increasingly partner or invest in fintech start-ups to broaden their distribution channels and fulfil specific clients’ needs, say industry players. For instance, Areca has emerged as a shareholder in Versa, a fintech start-up that wants to democratise money market funds, while Eastspring Investments Bhd has partnered with StashAway to distribute its Islamic Income Fund via the latter’s mobile app.

Permodalan Nasional Bhd, one of the largest fund managers in the country with RM312 billion under management last year, partnered with Raiz Malaysia Sdn Bhd this year to launch a micro-investing app that allows people to invest their spare change in Amanah Saham Nasional Bhd unit trust funds.

Additionally, Areca is on the lookout for an insurance technology (insurtech) start-up to invest in, to fulfil the specific needs of its clients. “There are a growing number of emerging affluent clients with annual incomes of RM300,000 and above. They do not want to pay a high premium to purchase complex insurance products such as investment-linked policies. And they do not want to pay a high commission to agents if they can buy certain policies directly online. We are looking for an insurtech start-up that can provide us with such a capability,” Wong explains.

Meanwhile, many — if not all — of the wealth management and investment events are now conducted online. Such a trend could persist moving forward, says Financial Alliance’s Sani. “We are not flying to various places in Malaysia, like Penang, to rent an auditorium to host our monthly events anymore. We have to do them online. And to our surprise, we managed to get about 200 people to attend those online seminars, which was unthinkable just a year ago.

“We have saved quite a lot of money from not conducting physical events. But admittedly, we have had to invest more in technology and digitalisation.”

He believes that even when the virus outbreak blows over, physical events are unlikely to be at pre-pandemic levels. “There will be fewer physical events. The large annual conferences will continue for branding purposes. We want to let everybody come together once a year. We may also continue to organise some small meet-up dinners with four to five people to have closer interactions. However, we are likely to move various mid-sized events that cater for 30 to 50 people online,” he says.

Alternative asset classes, in particular bitcoin, could be further popularised and become part and parcel of investors’ portfolios in the new normal as investors look for higher returns and diversification, he adds.

“We have tied up with EthisCrowd [Malaysia’s first Islamic equity crowdfunding platform] to provide clients with alternative asset classes. Cryptocurrencies, mainly bitcoin, has sparked a lot of interest among investors looking for non-market-correlated asset classes. I can see bitcoin gaining traction in the future as it has been there for more than a decade and has slowly gained the confidence of the investment community,” says Sani.

Asia, which has weathered the pandemic storm better than the developed world, is in a good position to benefit from the next normal. In 2021, economic recovery in the region is expected to be on track, with growth averaging 5%, according to some research reports.

The reports note that there were US$34 trillion in onshore personal financial assets at end-2019 and this will continue to grow, albeit at a slower rate compared with the pre-pandemic era. Yet, the region is underpenetrated in terms of wealth management and advisory, as well as financial planning.

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