Hong Kong’s tallest building, the International Commerce Centre, is symbolic of the remarkable semi-autonomous territory of China. Though typhoons force the building’s occasional evacuation, and the structure even sways in the wind during adverse weather, its construction went ahead undaunted and it continues to prosper.
A market trading ‘can-do’ mentality has been driving the economy to new heights, but it is very dependent on the property market and prices remain high despite recent efforts from the government to cool the market.
The latest Mercer 2012 Cost of Living Survey puts Hong Kong ninth in the world – with London, for example, at the 25th position – and a key driver here is the limited supply of land suitable for building.
With rents and property prices for offices and homes now recovered to post-2007 levels, there are consequent high fixed costs.
According to Q1 2012 research by Royal Skandia (based on Hong Kong individuals with investable assets of £150,000), the high cost of living, largely driven by the high property prices and rents, was the key influencing factor for individuals of whether or not to move away.
Yet with China’s economy still growing at nearly twice the rate of developed countries, Hong Kong is strategically well placed and conditions are still reasonably buoyant in comparison with the gloomy outlook in Europe.
For independent financial advisers, it is a stimulating and exciting place to work in 2012.
The IFAs are relatively well established and far bigger in terms of numbers than its main rival in the region, Singapore, which has its own distinct advantages with a private banking bias.
Fee-based advice
Melanie Nutbeam, senior associate of HFS Asset Management in Wan Chai, who believes fee-based advice has a good future in Hong Kong, says the local attitude to risk of investors is distinctly opportunistic.
“Day trading is prevalent at all levels of society, and office discussions about what you are having for lunch start with the cost. After a few years of living here, you cannot help but recognise arbitrage opportunities when you see them.
“Clients are generally switched on and interesting to work with. In developing financial plans for them, it is necessary to build a flexibility that caters to their mobility.”
She adds the temptation for many clients is not to plan as they do not know where they will be next, so they need to be persuaded to at least draw some lines in the sand.
“Making sure they save is a good starting point. The multi-jurisdictional tax issues that crop up are interesting and intellectually challenging.”
Vital to building business connections, she describes Hong Kong as a networking city where her memberships include the Foreign Correspondent’s Club, the China Club, the Royal Geographic Society, and she is a director of the Australian Chamber of Commerce in Hong Kong and Macau.
“Social media is alive and well here, but nothing beats building personal connections,” she says.
China gateway
Another adviser, Joseph Chen, who is chief executive of MEGA Global Capital Management, also in Wan Chai, highlights positives such as the favourable tax system, with low income tax and no inheritance or capital gains tax plus the easy set-up of offshore accounts.
He also says Hong Kong is a highly liquid market which provides a gateway to China through H shares (a share of a company incorporated in the Chinese mainland that is listed on the Hong Kong Stock Exchange) and “access to Mainland Chinese high net worth individuals who view Hong Kong as a beacon for investment opportunities and security.”
But Chen says there has been a reduction in the number of expats holding senior executive positions in multi-national corporation:“Since the financial crisis in 2008, senior expat clientele have increasingly been replaced by Western-educated Chinese.”
Nutbeam picks out another theme where Hong Kong professionals educated overseas return home with an understanding of how financial advice is provided for in other countries and have “an appreciation of the role financial planners can play and seek out our services”.
Survivalist edge
This links to Chen’s view that IFAs are now under pressure to provide an integrated service covering mutual funds, pension funds and employee benefit insurance “in order to maintain a competitive edge and survive” and an increasing focus on salary rather than commission-based remuneration.
However, for other IFA businesses, notably for those catering to the local market, the commission model is still operating in full force.
With the retail banks taking a dominant position in the investment-linked insurance market and the prevalence of insurance agents, the product offerings can look relatively unsophisticated and Chen says the local attitude is still at an “infant stage compared to the Western world, being more focused on savings and low-risk investments”.
At the upmarket end of the adviser world, Philippe Legrand, chief executive of London & Capital Asia, describes his business as an independent wealth manager and investment banking boutique.
His clients are professional investors who must have a minimum of US$1m of liquid wealth, such as accountants and lawyers “who have made a nice little nest egg”, and entrepreneurs with businesses in manufacturing, trading, property development and consumer sectors where much wealth has been created.
Legrand uses a core and satellite approach to investment, but his clients also like a “pot of play money” of up to 20% of their wealth for short-term speculative investing.
On the remuneration front, he says the Asian clients have difficulty in taking a flat fee for the advising, particularly when 50% of the portfolio is in cash.
Another common financial planning twist is where clients borrow at 1% and place the funds elsewhere to yield 2%, made easy by banks’ standard credit lines secured on liquid assets.
IIA regulation
In 2010, the Financial Services & Treasury Bureau issued its first proposal for a new Independent Insurance Authority (IIA) to replace the Office of the Commissioner of Insurance (OCI) and the four self-regulatory organisations.
The IIA is expected to be formed in 2013, with a transition to the new framework taking a further three years in order to licence the intermediaries.
Bancassurance activity is jointly overseen by the OCI and the Hong Kong Monetary Authority.
Mike Leeson, head of sales in Hong Kong and NE Asia at Royal Skandia, says: “In all sectors, there has been a strong focus post-Lehman on customer protection. The key to future developments is consistency across the regulators and sectors of the market, thereby ensuring the best outcomes for customers.”
Commission ruling
Nutbeam concurs: “A consumer might buy a mutual fund from an IFA, an insurance agent, or an MPF agent and all would be subject to different regulations. This also makes for added business complexity and costs, for those businesses providing services under the authorities.”
She highlights a recent case in Hong Kong where a client, Hobbins, sued his adviser for not acting in his best interests but, rather, to earn commissions.
Hobbins’ claim was unsuccessful as the payment of commissions had been disclosed. However, the judge added “the practice of insurers paying commission to insurance brokers may or may not be unsound. It ought possibly to be strictly regulated or even prohibited.”
Hong Kong does not require the detailed statements of advice needed in Australia, where she has also worked, nor are its disclosure requirements so onerous.
“This is both an advantage and a disadvantage. It is expected that, in the wake of Hobbins’ case, disclosure requirements will be more prescriptive.”
New players
According to independent platform provider iFAST, the Capital Investment Entrant Scheme (CIES) has “opened up tremendous opportunities for Hong Kong’s financial advisers, even though the government raised the CIES requirement from HK$6m to HK$10m and excluded property purchase in late 2010”.
Mainland Chinese citizens have to invest via the CIES to be eligible to apply for Hong Kong’s permanent residence status.
Among those businesses overseas forging new links is Wells Fargo Fund Management, part of a high-profile US banking group, with Asia-tailored funds investing in such areas as precious metals and US equities.
Meanwhile, Convoy’s chief executive Rosetta Fong highlights the MPF employee choice arrangement (ECA), due to commence in November this year, whereby more than 2.5 million employees in Hong Kong will be able to choose the MPF schemes that suit their needs for their own contributions.
An influx of new entrepreneurs and institutions is chasing the China growth story, according to Nutbeam: “I am overwhelmed with the number of people contacting me trying to interest me in their product, whether it is investment opportunities, support services or business opportunities.”
