Kurtosys met with Simon Ellis, global head of client segments at HSBC Global Asset Management to hear his views on the two biggest (and most obvious) untapped client markets, where he thinks the regulator’s direction of travel is headed and the aspects of the market that are set for further scrutiny.
As the asset management arm of such a behemoth in the banking sector, how closely related, or separate, is HSBC Global Asset Management?
The primary aim of HSBC Global Asset Management is to be a preferred provider of investment solutions to the broad client base of the group – not just our own retail customers or pension fund clients, but all of the corporate clients and personal customers that the business has globally. It therefore means that we have a business which combines dealing a lot with external third-party clients and then dealing with internally driven clients as part of it.
We have a symbiotic relationship in terms of client relationship management, but have a very specific set of different products. We have a lot of direct contact with intermediaries, corporate customers and government customers but we do not have direct contact with the retail private investors as an asset manager, so that is our business model.
And what about culture?
The group has a very strong culture; it is very inclusive, very collaborative and very diverse, so those core cultural values absolutely permeate the asset management business just as much as they do the bank.
What is the one question wholesale clients most frequently ask you?
Being in the UK there is an obvious one around politics, the usual global macro themes, all that kind of stuff.
The main thing underlying so many questions at the moment is a concern around the direction of travel for the industry as a whole. Where will regulation take us? How is this whole pricing and value debate going to impact on the entire value chain? How do we see the business environment evolving given regulatory pressures, technology, the pressure on pricing, questioning around active versus passive? All those things add up to ‘what does the future look like in three or four years’ time?’
And therefore, where do you see that direction of travel headed?
I do not think it is particularly difficult to work out where we are going. Globally, regulators have a rough vision of how they would like the industry to work, which is a world in which conflicts of interests are very transparent and thereby get competed out, second that the industry is far more transparent around the services being provided and the cost of those services, and third that the quality of advice is much higher – that the quality of advisers is demonstrable and the suitability processes inside advice practices are higher than they see them as being today.
So those three things: removal of conflicts of interest; more transparency; and improving the quality of advice, those are the three things which I see as the focal points today.
What do you see as the most challenging aspect of all that?
I think the challenge really is managing the pace of change rather than the changes themselves.
So much is going on as this industry evolves. Though we call it an ‘industry’, I think we are moving from having been a ‘craft’ with individual portfolio managers, in a way set up like collective shops of ‘weavers’ for example, who are incredibly skilful and therefore will be rewarded accordingly. But the variability of that craft-based approach is not so suitable for mass market savings, or large numbers of DC pension funds, where you need to reduce the costs and increase the reliability. In those cases, we must become an industry.
Industries are about processes, efficiency and standardisation and we are going through this emotional and intellectual battle between the demise of the mass craft into it becoming an industry.
I believe there is still room for the craftsmen and women to live alongside the industrial approach, but it can no longer be just craftsmen nor just industry – I think that is what is going on.
So, all that said, where is the biggest opportunity in amongst all that?
We have spent most of the last 20 years as an industry, or craft, serving the needs of a well-established group of wealthy customers who are primarily male and older. I think as all these competitive and regulatory pressures are putting strains on that business model and its profitability, we now need to start thinking about new markets or new customers. That is not necessarily new markets geographically (although for HSBC, clearly Asia and China are big areas for development) but so far we have generally missed two markets that exist on our doorstep already.
The first is female investors. If we look at the levels of participation in investment savings and funds by women, we have been ‘missing a trick’ and that is a collective failure.
In principle that does not require a lot in order to change, because funds are essentially ‘unisex’. The communication and engagement need to change and so I think that for some firms – of which we would like to be one – reappraising how we should be supporting women in lifetime savings is a combination of a great opportunity, and to some extent a duty. Equally, it does not look in principle that hard to do either.
The second is younger investors. Because they have tended, at least in developed markets, to have less money, the existing business model is not particularly interested in them until they have built wealth.
But they do not seem to value intense face-to-face advice; they are more interested in digital or multichannel interaction, peer-to-peer or self-reliance as a way of understanding.
At this point they seem to have a preference for lower-cost investing and a view that their money should be used in a (loosely termed) ESG style.
Crucially these are the people who will inherit most of the money in a relatively short period of time from the early baby-boomers, with the next 10 years set for a huge amount of wealth transfer. And I do not think the industry is particularly well prepared for that.
The second thing is this is the age group that has actually got the money in Asia. The amount of entrepreneurial wealth being generated by under 40s in Asia is hugely disproportionate and therefore that is the market in Asia. It’s the young people, male and female, generating wealth from running businesses; they are first generation wealth-creators.
How is technology growing in terms of how important it is on a day-to-day basis?
The first and the most obvious is the technology inside the business itself trying to improve the reliability and reduce the costs of the everyday operating model, so that would be ‘classic’ technology.
The second area is in relation to the investment functions, so the use of more and more technology, big data and quantitative systems to improve the access to ideas and information for portfolio managers to introduce more systematic investment techniques, so factor investing is very important for us is a big growth area.
The third piece is engaging customers online, but there has been less progress here. How do we inform, serve, persuade intermediaries and end customers using technology? We know that digital channels and content are key, but I think we are all trying to understand what ‘content’ really means.
Which area of fund management do you think needs a complete rethink, if you could overhaul one aspect?
I think the whole area of ‘additional expenses’ requires a thorough review if we are to restore faith in the value of what we do for clients.
This includes the incorporation of technologies such as blockchain into parts of the value chain that lend themselves to automation, for example transfer agency and record-keeping.
We have to recognise that all costs are under scrutiny, and in particular how actively we control external costs. It’s challenging. How do we explain fair levels of fees for custody, fund accounting for example – it’s quite arcane – or even the fees being charged by index providers for trackers and ETFs?
We need to redefine the value of what we do, whether that is exercising good judgment in managing portfolios, or pro-acting in the economy through strong governance of our investments.