Chinese demand growing for financial advice

China’s emerging affluent are increasingly likely to use financial advisers to help them make investments, as the incentives for emerging market investors to look offshore continue to grow, according to a Legg Mason poll.

In the US fund house’s 2014 global investment survey, some 87% of respondents in China who do not have a financial adviser say that they will be interested in working with one in the future. That is more than double the proportion (39%) who now use a financial adviser, according to the poll of 200 individuals with $200,000-plus in investable assets

“You’ve got rising levels of wealth, and obviously – given the complexity of investing, the dynamic nature of global market, volatility and interest rates – the need for professional advice has never been greater, and we see evidence of wanting it,” says Matthew Schiffman, head of global marketing at Legg Mason.

Moreover, 87% of those surveyed say they have already made investments outside their domestic market, which is above the levels seen in other Asian markets such as Singapore (77%) and Japan (59%).

Yet those Chinese investors who have invested abroad have only allocated 18% outside their home country. This serves as an opportunity for global fund managers to tout their investment credentials.

Legg Mason says it has already capitalised on the trend among mainland investors to invest globally through its qualified domestic institutional investor (QDII) funds.

Three years ago the firm had two distributors for its QDII funds, but now seven foreign banks operating in China are selling its funds there, says Freeman Tsang, head of Hong Kong and China. It is understood that a few mainland banks have also signed up to distribute its products.

Legg Mason says it has seen an uptick in interest for its QDII products, without providing more detail. There was a stall in the QDII market when the scheme launched in 2007, but it regained momentum in 2009, when EM stocks fell and developed market equities rallied.

One reason investors should raise their international allocation is the growing gap between expected and actual returns, the findings suggest. Generally, that gap is higher for investors based in emerging markets than for those in developed markets.

Part of this can be explained by inflation reducing real returns. Indeed, 56% of China respondents cited inflation, which currently stands at 4.5% this year, as one of their top investment challenges.

Another reason to look abroad for assets is the ‘tapering’ of quantitative easing by the US Federal Reserve, which has led to falling EM bond prices.

But when asked whether a fund’s management costs, which was not an area covered by the survey, is a factor in Asia, Schiffman said: “I wouldn’t characterise cost as the leading concern.

"I do believe that investors, certainly in more developed markets, are becoming aware of internal costs [of funds], and I would say that’s a good thing.”

Meanwhile, in light of the survey, he says Legg Mason is looking to produce more products that produce unconstrained returns.

Most Chinese, Singaporean and Taiwanese investors surveyed (69%, 64% and 63% respectively) see their biggest obstacle to living a desired lifestyle in retirement is a catastrophic event that will lead them to use up their retirement funds.

“Those numbers are huge and I think that is a continued hangover from the financial crisis of 2008,” Schiffman says.