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Since the pandemic, the wealth management industry has experienced a huge upheaval. Some large wealth management companies have successively experienced "thunderstorms", and the industry is full of chaos. As a subsidiary of a mutual fund, Harvest Wealth was keenly aware in 2019 that the financing-driven wealth management business model with land finance and infrastructure as the core was unsustainable.
"Good Finance, Always Accompanying" is the core value proposition of Harvest Wealth. We believe that the core of wealth management is the rational planning of cash flow based on the whole life cycle of customers. The core needs of customers are long-term continuous and stable cash flow, just like running a business, perhaps profit is not the most important, the most important thing is healthy cash flow.
Buy-side advisors, on the other hand, strive to make diversified products, tools and solutions serve the needs of customers. The professionalism of buy-side investment consulting is reflected in the use of products, tools and solutions to serve customer needs. Assets are not the center, customer needs are!
When a number of long-term locked equity funds have collapsed, it should be recognized that there is only one real long-term companionship on the road of financial management, that is, the financial planner's accompaniment to customers based on the deadline goals and achievement rate, dynamic adjustment, and through the cycle. The in-depth companionship between financial planners and customers is the top priority for the high-quality development of the buy-side investment advisory industry.
In the context of wealth management transformation, this article expounds Harvest Wealth's thinking and practice of "buyer-agent", and explains how to go through the cycle with customers and pursue satisfactory returns from the standpoint of buy-side investment advisors.
1. Revisit, what is wealth management?
Wealth management, unlike asset management, is primarily driven by customer needs. Asset management looks at the laws of asset pricing, how asset prices behave over different cycles, portfolio construction, and risk management and performance attribution. Wealth management, on the other hand, tends to focus on people's needs, how to achieve wealth appreciation, value preservation, inheritance and confirmation, as well as wealth recreation through the cycle.
Since 2012, Harvest Wealth has clearly realized that wealth management needs to match the needs of customers, help customers plan cash flow in the life cycle, and achieve wealth preservation, appreciation and inheritance in the long cycle.
According to the China Merchants Bank 2023 report, the total wealth of Chinese residents is about 600 trillion yuan, of which about 400 trillion yuan is invested in real estate. Real assets account for nearly 70% of residents' wealth, the highest in the world. The main reason is that China's real estate market has experienced a golden age in the past 20 years, with land monetization and local government infrastructure driving land values. In addition, Chinese residents own about 200 trillion yuan of financial assets, including insurance, bank deposits and money market funds. The total amount of premiums paid by residents is about 27 trillion yuan. Bank deposits are about 130 trillion yuan, accounting for nearly 60% of financial assets. The scale of wealth management products is about 25 trillion yuan, and the scale of trust products is about 21 trillion yuan. Among the asset classes with higher risk appetite, non-stock public funds are about 16 trillion yuan, and securities private placements are about 6 trillion yuan. At the top of the pyramid is private equity, which enables long-term wealth growth by investing in shares and equity in private companies.
Figure 1 Household investment pyramid
Data source: the official websites of various industry associations, the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission. The data of public and private securities funds, wealth management, deposits, and insurance are as of the end of June 2023, and the trust data is as of the end of March 2023.
2. Accurately portray the "pyramid" of customer needs
In the past era of rigid payment, investor portraits did not help much in guiding customers' financial management. So for a long time, investor profiling has become a routine of "going through the motions" in a sense. In the past, China's investment was mainly a growth logic, stemming from urbanization, land monetization, and the unleashing of entrepreneurship. After the 2008 financial crisis, the Chinese government's $4 trillion stimulus package resulted in double-digit GDP growth.
Against the backdrop of declining economic growth and an aging population, the way of managing money is quietly changing, and customers are paying more attention to cash flow and "keeping their pockets safe". Investor profiling becomes crucial. Because financial products are managed on a net-worth basis, there is no rigid payment of guaranteed principal and interest. It is impossible for the financial market to rise every day, volatility is the norm and nature. It takes time and process for customers to be aware and familiar with fluctuations. For bank wealth management customers who are accustomed to guaranteeing principal and interest and non-standard fixed income trust customers in the past, some people are not even accustomed to the reality that "even if they invest in bonds, they may lose money", let alone imagine that investing in stock funds may have a floating loss of 10% a month.
If you don't do a good job of customer profiling, selling an equity fund to an investor who doesn't have any previous relevant experience may face suitability issues. In addition, different customers have different perceptions of volatility, and the profile of investors becomes particularly important.
Figure 2 Investor demand pyramid
Data source: the official websites of various industry associations, the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission. The data of public and private securities funds, wealth management, deposits, and insurance are as of the end of June 2023, and the trust data is as of the end of March 2023. The value-added, interest-earning, and protection mentioned in the above diagram are only conceptual classifications based on customer needs, and are not based on the risk level of products/services. Examples are for reference only and may vary between different classification methods. It does not constitute the promotion of any product or service, does not constitute specific investment advice, and does not represent the scope of our company's sales. The market is risky, and investors need to be cautious. There is no guarantee that investors will make a profit, nor does it guarantee that the minimum return or principal will not be lost.
From the perspective of demand, the real demand of customers for financial assets is based on the 11% guarantee, which is the ballast stone of the customer's account, reflecting the bottom-line thinking of account allocation to cope with unexpected needs.
The interest-bearing assets corresponding to interest-bearing needs include deposits, money market funds, wealth management products and trust products, etc., which essentially reflect the dual needs of customers for principal and stable cash flow. The source of cash flow for interest-bearing assets varies slightly depending on the financial product. The further expansion of the scope of interest-bearing assets could cover residents' investment properties, such as retail and non-owner-occupied properties. The most rigid demand of customer wealth management is to pursue a relatively stable principal and interest income on this basis. As a stable asset, real estate can often bring stable rental income, which is just right for the needs of customers. The reason why Chinese are keen to invest in real estate is not only to meet rigid needs and improve living conditions, but also to reflect the concept of "one shop for three generations" in China.
The value-added demand corresponds to the long-term appreciation of the customer's RMB-denominated assets. In the long run, the value of the currency will decrease with inflation, and the purchasing power of the renminbi will be diluted by the large amount of money that is injected into the currency. In order to maintain the long-term appreciation of assets, clients need to participate in equity investments and other high-risk investments. Such investments accounted for about 14%, a decrease from the previous period, reflecting the decrease in net asset value caused by the market decline in the past two years and the change in the investment logic of customers.
Depending on the life stage and income expectations, everyone's wealth allocation pyramid will be different. Overall, a relatively reasonable allocation should include 10-15% of protected assets, about 75% of interest-bearing assets, and about 15% of value-added assets.
As of the end of 2023, Harvest Wealth's clients are generally over-allocating value-added assets. The overweight of value-added assets stems from the path dependence of customers accustomed to investment returns in the past high-growth era. With the downturn in economic growth and the acceleration of aging, it is necessary to revise this high-yield expectation in the future, do a good job in reasonable expectation management, and choose the most suitable pyramid allocation.
3. Investment advisory methodology based on buyer's agent
The main task of the buyer's agent is to help the client plan the three parts of the pyramid: security, continuous and stable cash flow, and long-term capital growth. Protection is not only about bottom-line thinking and dealing with extreme risks, but also covers the confirmation of wealth in the process of inheritance, ensuring that assets can be distributed according to the customer's wishes. The core part of the pyramid is a consistent and stable cash flow, investing in real assets that generate consistent cash flow. At the top of the pyramid is to outperform inflation in the long term and achieve wealth preservation and appreciation.
In the past few years, the methodology of buy-side investment consulting has had a great impact on the business logic and values of the industry. This means not only focusing on the short-term returns of our clients, but also on long-term wealth management and value preservation strategies.
Looking back at the history of China's wealth management, for a long time, in a sense, the development of China's wealth management was actually the development of financing and shadow banking. Before the stock market crash in 2022, investors generally had great hopes for the future. The market has witnessed the rapid growth of core assets and the rise of star fund managers. In the past, the wealth management market was a sell-side ecosystem, and star fund managers had great appeal and influence. Clients not only rely on star fund managers, but even form a belief. This belief makes customers willing to accept a lock-in period of up to several years.
In the past, most wealth management companies had strong financing characteristics. After the introduction of the new regulations on asset management in 2019, the products of wealth management companies have gradually shifted from the past financing model to net-worth and linked to the capital market. In the process of transformation of the wealth management industry, most institutions still operate with a sell-side mindset, and the core of wealth management is still fund managers. However, it has been proven that neither strategies, products nor fund managers can truly navigate through market cycles, and performance is always cyclical.
The customer-centric methodology is quite challenging in practice, and requires sound institutional arrangements and consensus building. Since its establishment 11 years ago, Harvest Wealth has been committed to building a customer-centric system to ensure that the ideas of buyer-agent can be realized and implemented.
A culture of "customer first, financial planner second, middle and back office third, and management fourth" has been established within the company to ensure that the behavior of financial planners is highly consistent with the customer-centric philosophy. Harvest Wealth abandons the traditional sell-side mentality of "finding customers with products" and puts customer needs first. Harvest Wealth hopes to be customer-centric through the buyer-agent approach, so that every customer's funds can be matched to the right product.
Harvest Wealth attaches great importance to the company of its customers. In 2023, the company held about 60 "Ten Thousand Miles" activities. We strongly believe that wealth management is not just about delivering financial results, but also about providing emotional value. As an important part of the concept of "good finance, always accompanied", we attach importance to face-to-face, eye-to-eye communication, so that financial planners can accompany customers at every key node.
Fourth, the real practice from the interests of customers
The future has come, and we must not only see the huge size of China's wealth management market, but also see the historic changes in the internal demand structure. A series of favorable factors such as the reallocation of housing and not speculation, the reallocation of bank wealth management funds, the breaking of rigid payment, and the determined reform of the capital market are intertwined, all of which show a truth, that is, if we want to win the future and win the majority of investors, the wealth management industry must find a healthy and sustainable profit model that is consistent with the interests of investors. Under this model, the interests of wealth managers and investors are truly aligned. "Starting from the interests of customers", "customer-centric" and "buyer-agent" will become a new journey for wealth management institutions.
Thinking from the perspective of the interests of customers, it is necessary to fundamentally change the profit model of wealth management institutions. Gradually transition from the past model of relying on client trading commissions to a model of charging investment advisor/account service fees. For example, wealth institutions provide clients with investment advisory portfolio services or account services, rather than individual fund products. On this basis, it is necessary to do a good job in customer portraits and allocate appropriate financial products to customers. In the post-investment period, it is necessary to pay attention to customer accompaniment and investor education. Establishing full trust with users through timely and thoughtful companionship is the only way to alleviate investors' post-investment anxiety and practice long-term investment.
The wealth management industry operates on the trust of investors. The establishment of trust takes time to accumulate, and it is not easy to come by, step by step. But the collapse of trust is sometimes instantaneous. The numerical advantage of customers is not eternal, and in an era of drastic changes in customer needs, if there is no good wealth management model to match the needs of customers, customers will be lost quickly. Under the great changes unseen in a century, we use the new thinking framework and professional solutions of the buyer's agent to meet the financial needs of customers, which is the real stand on the customer's standpoint, not forgetting the original intention, and committed to creating returns for customers and forging ahead!
Disclaimer: The information or views expressed herein do not constitute investment advice to any person, nor do they take into account the particular investment objectives, financial situation or needs of the recipient, and should not be relied upon as the basis for investment decisions. The data and information contained herein are derived from publicly available market information or other sources that the Company believes to be reliable, but the Company makes no representations or warranties, express or implied, as to their accuracy or completeness. The content of the third-party reports, materials, information, etc. reproduced in this article only represents the views of the third party and does not represent the position of the Company. There can be no assurance that the views or statements contained herein will not change and the Company may issue reports at different times that are inconsistent with the information, opinions and projections contained herein. The examples of wealth planning mentioned in this article are only based on customer needs, and the value-added, interest-earning, and protection mentioned are only conceptual classifications based on customer needs, rather than classification of products/services according to risk levels. Examples are for reference only and may vary between different classification methods. It does not constitute the promotion of any product or service, does not constitute specific investment advice, and does not represent the scope of our company's sales. The market is risky, and investors need to be cautious. The Company does not guarantee that investors will make a profit, nor does it guarantee that the minimum return or principal will not be lost. Investors should fully consider their risk tolerance and risk identification ability, and invest prudently.