Asia's affluent lose one-fifth of wealth in 2008

It was perhaps inevitable that after experiencing such rapid wealth growth in the past few years, Asia's high-net-worth individuals suffered particularly keenly from the recent crisis. But there is still huge market potential in the region for advisory firms able to tap it.

The wealth of the region's high-net-worth individuals (HNWIs) -- those with $1 million or more in investable assets -- fell by 22.3% to $7.4 trillion last year, below the level in 2006. That compares to a fall of 19.5% for global HNWI wealth, according to the 2009 Asia-Pacific Wealth Report, released yesterday by consulting firm Capgemini and Merrill Lynch.

Hong Kong HNWIs saw by far the biggest drop, losing 65.4% of their wealth, followed by those in Australia (29.7%), Singapore (29.4%) and India (29.0%). South Koreans got off lightest with a 13.4% decline in asset value, while Japan saw a fall of 16.7%.

In terms of market capitalisation, the Asia-Pacific region as a whole saw an average fall of 48.6% last year, with China (60.3%) and India (64.1%) suffering the biggest declines of the countries surveyed*.

With regard to asset allocation, the report noted three key trends. First, Asian HNWIs undertook a 'flight to safety' to cash-like assets with their allocation to cash-based investments rising to 29% in 2008 from 25% the year before. This reflected an increase in the global allocation to cash in 2008 to 21% from 17% in 2007. Taiwan had the highest allocation to cash/deposits at 41% of its total portfolio, while India had by far the least with 13%.

Another trend was an opportunistic shift back to real estate investment with an allocation of 22% in 2008, up from 20% the year before. Regionally, Australia had the highest allocation to real estate (41%), closely followed by South Korea (38%), while Taiwan had the least (15%).

As for other asset classes, India had the largest allocation to equities (32%), despite the heavy fall in the country's stock market last year, while South Korea had the smallest (13%). And, perhaps surprisingly, Indonesia had the largest allocation to alternative investments (9%), covering structured products, hedge funds, derivatives, foreign currency, commodities, private equity and venture capital.

The third broad trend noted by the report was a retreat to home-region and domestic investments with HNWIs increasing their domestic investments to 67% in 2008 from 53% the year before. China was the top Asian market for investment by HNWIs in Asia-Pacific ex-Japan, while their peers in Japan preferred to invest domestically.

Allocations to mature markets are likely to increase through 2010 as Asia-Pacific HNWIs seek more stable returns. Allocations to North America, for example, are predicted to rise from 17% last year to 20% in 2010.

In terms of diversity of geographic distribution of investments, Japanese HNWIs were the most diversified beyond Asia in 2008 with 45% of their allocation outside the Asia-Pacific region. The least diversified were the Chinese, with a 17% allocation outside Asia-Pacific, and India with a mere 14% invested outside the region.

On a wider level, the crisis resulted in many Asian clients shifting their assets towards regional and local firms, changing the competitive landscape. Such moves exposed "weaknesses in the capabilities of the region's wealth management firms and especially revealed the disparate strengths and weaknesses of international firms versus regional and local competitors", says the report.

In terms of the challenges faced by wealth management firms in Asia, they feel maintaining client trust/client retention is by far the biggest concern, according to a Capgemini survey carried out during July and August. Eighty-five percent of wealth management advisers cited this as the biggest challenge they face as a result of the crisis, and 45% cited as the next major issue the need to have the right skill set and talent to cater to HNWI clients.

A closer look at the issue of client attrition shows that 42% of wealth advisers lost clients last year; 63% of those advisers employed an individual-adviser model, while 37% used a team-based model. Meanwhile, younger advisers tended to lose more clients than older ones with 62% of those who lost clients being 40 or under. "Advisers were not mature enough to handle the intense market conditions," says the report.

Experience is clearly key, and advisers in the Asia-Pacific region were less well able to handle the economic turmoil. The average amount of experience for the region was 9.7 years, versus the global average of 13.3 years. Wealth management firms need to remedy this situation if they are to make the most of the untapped market potential in China, India and elsewhere in the region.

 * The report focuses on 11 markets: Australia, China, Hong Kong, India, Indonesia, Japan, New Zealand, Singapore, South Korea, Taiwan and Thailand. Together, these account for 95.3% of Asia-Pacific gross domestic product.