What’s the take up of digital banking tools like among high network investors (HNWI)?
A report by Accenture-US states that “87 percent of high net worth investors use digital services for financial services”. However, it does not explicitly consider whether these digital banking tools are day-to-day digital banking activities (i.e., funds transfer, bill payment, monitoring of income & expenses in bank accounts) or digital banking investing activities (i.e., reading sell-side/buy-side research reports, re-balancing investment portfolios, executing stock trades).
What do they use – what don’t they use in terms of digital banking tools and why?
Everyday digital banking tools are heavily used, whereas digital investing activities are less likely to be used by HNWI. Thus , the opportunities that are ripe for disruption are to improve the up-take amongst the use of digital banking tools for investing by HNWI.
The measurement of the adoption of digital banking tools should consider age as a factor. If we compare 60-year old versus 30-year old HNWIs, the take-up digital banking tools for investing purposes will be very different. An elderly HNWI is likely to augment any personal investment research by having discussions with his/her financial advisor & accountant when making investment decisions, and allowing the financial advisor to execute those investment decisions on their behalf. On the other hand, a younger HNWI is likely to speak to a network of informed friends/associates for their insights before executing any trades on an online-platform/mobile phone. Although these actions may be due to inherent risk profiles across different age groups, they are also heavily influenced by the wider scope of investments being held by an elderly HNWI that considers tax-advantages (e.g., negative gearing in real-estate investments, divided imputation with defensive stocks, lower tax payable with superannuation investments). Elderly HNWIs are more likely to hold less liquid investments (i.e., real-estate, bonds). Younger HNWI may have experienced a windfall (i.e., inheritance) or a high-paying career that results in investments consisting of savings and a higher superannuation balance that are more liquid. Thus, liquid investments are more easily re-balanced using digital banking tools, thus explaining the greater uptake of digital banking tools for investing by the younger cohort of HWNI.
Any innovations for HNW around digital banking and what difference do they make to their wealth?
The primary innovations for HNW for digital banking are tools that allow investors to easily (i) understand their investment goals (ii) engage in investment activities according to their level of interest. The key word here is “easily”.
First, financial research indicates that when choosing between investment goals described as “$10 million to be accumulated” versus “monthly income of $5000“ across 20 years of retirement, most HNWI choose the latter. This reflects that although investment goals can be explained in terms of capital gains and income-generation, income-generation is a concept that more easily understood and perceived as achievable by HNWI compared to capital gains. Thus, one major innovation is showing HNWI the impact that different investment choices have on their monthly income, rather than a target amount to be accumulated.
Second, HNWI have different levels of interest in their personal engagement of their own investment portfolios. Digital banking with the use of Exchange traded funds (ETFs) has been one of the most effective financial innovations in the last decade as they exemplify the ease at which investors can easily obtain exposure to key investment themes of interest with high-levels of liquidity and transparency. For example, for HNWI whom are passive, target date funds (e.g., BlackRock’s Lifepath products) might be suitable where the asset allocation process automatically transitions towards being more conservative (i.e., equities to fixed income) over time. Other HNWI may have strong personal beliefs in protecting the environment or believe in sustainable business practices and choose to invest in ESG products. Investors with an educational background in finance may choose to take advantage of risk factors shown to outperform the market index during different points of the business cycle (i.e., Andrew Ang’s Factor Investing), and can invest in factor based investment strategies. Other more technologically oriented HNWI may have a keen belief in the application of quantitative investment strategies, and can select ETFs whose portfolio managers’ use such tools (e.g., BlackRock’s Scientific Active Equities).
What difference have these innovations made to the wealth of HNWIs? By making investing more accessible both in their understanding and in the execution process, HNWI can use the deployment of their capital as a tool of empowerment to develop areas that they have personal interest in such as sustainable investing, technology, infrastructure, etc. Increasing accessibility engenders greater personal interest, and wealth will follow as investors continue to improve their financial education and make better investment choices.
Investment opportunities in Asia
What markets are hot in terms of investing in Asia?
The areas of technology and infrastructure are hot areas to be investing in Asia. The population demographics in Asia are still relatively young compared to western democracies, and are more likely to adopt disruptive new technologies in their everyday lives. As a larger proportion of the rural populations shift towards living in metropolitan areas, infrastructure investments are required to accommodate this population growth in a sustainable and affordable manner. For example in China, the retail market has virtually skipped the traditional brick-and-mortar space and straight into internet shopping with the rise of Alibaba. With the increasing use of ride-sharing and automated cars, it may not be economically feasible or convenient for individuals to own their own cars or for governments to invest in forms of localized public transportation such as buses, trams, or the subway. Thus, large scale infrastructure products such as high-speed trains to travel across regions are more impactful and present better investment opportunities.
What assets classes in Asia offer growth?
Asset classes in Asia that offer growth would be in equities and alternative investments. In the equities space, I would focus on the technology sector, and in the alternatives investments I would focus on transport or healthcare infrastructure. These sectors offer direct benefits in improving the lives of a young and growing metropolitan population that easily adopts new technologies, and a society that is not burdened by expensive legacy infrastructure that is expensive and difficult to expand and maintain.
In the technology space, we observe that local Asian companies such as GrabTaxi and DiDi are taking western digital inventions like Uber and adapting it for the local environment. These firms are so effective at innovating these technologies specifically for the local populance that foreign companies like Uber have exited such markets, and left it to local competitors to develop based on their their superior on-ground cultural knowledge and expertise.
The Asian culture places great value in assets such as real estate and infrastructure as they are tangible and perceived as ‘safe-haven’ investments. Thus, investments in large infrastructure projects are valuable opportunities as they will be heavily used and paid for by a young and growing populance, are well-supported by the regional governments for improving the livelihood of the residents of the area, and construction and maintenance of these infrastructure projects create many jobs and contribute to the regions’ GDP.
How does a tilt to Asia in a portfolio help to generate wealth?
Although there may be greater political risks, the population demographics in Asia are indicative of a growing middle class with an appetite for the consumption of high-quality goods that result in an economic expansion and greater opportunities for wealth creation. As Australia generally exports resources and tertiary education in Asia, a tilt of investment portfolios towards Asia allows Australian investors to partake in the new technologies and products that are being developed and manufactured in Asia. Furthermore, investing in Asia has a diversification effect on an investment portfolio, thus increasing risk-adjusted returns over the long-term.