Citibank’s ambitious plans for the South Korean market and a boom in fintech are invigorating the country’s wealth management sector, despite rising tensions with North Korea. Elliot Smither reports.

Hojune Chang

The South Korean wealth management scene has long been dominated by domestic companies. Wealthy individuals have turned to the likes of Shinhan, KEB Hana, Woori Bank and Kookmin Bank for their private banking, and while some foreign banks have entered the market, some have pulled out and others remain in a relatively limited capacity.

But is the situation about to change? In March this year, Citibank announced ambitious plans to double its wealth management assets under management in South Korea by 2020, and open new centres in Seoul, Dogok and Budang.

“We see an opportunity in offering investment advisory solutions to the emerging and affluent sectors,” says Valentin Valderrabano, managing director and retail bank head at Citibank Korea. “We are basically targeting three segments: CitiPriority for customers with financial assets of between $50,000 and $200,000; Citigold for customers with financial assets between $200,000 and $1m; and Citigold Private Clients for customers with assets in excess of $1m.” 

Some of these clients are expected to be new entrants to the wealth management space, he adds, although others will be customers from other firms “looking for alternative providers”.

Citi’s ambitious move

So how worried should incumbent banks be? Joong Ho Park, financial services partner at management consultant Oliver Wyman, believes Citi’s plans could shake up what is already a competitive landscape but one in which local players have had an edge over foreign firms.

As to when this disruption could be expected, much will depend upon foreign players being able to access the country's more sophisticated customer base, where their proven tools and assets in other markets give them an advantage. Managing to build up level of trust in their brands among these potential clients will be a key selection criteria, he explains.

Competition among wealth managers is certainly getting hotter, says Mr Park, as providers race to expand their coverage to a wider customer base, boost their non-branch channels through the use of technology and offer a wider range of services to high-net-worth individuals.

If the appetite for a broader range of products is really there, then this is undoubtedly an area where Citi’s global capacity could provide an edge. Real estate investments and deposits have traditionally been the areas where wealthy South Koreans have gathered their assets, and prior to the financial crisis these provided them with ample opportunity to grow that wealth. As such, financial investments held relatively little appeal for them.

Expanding horizons

But the financial crisis of 2008 proved to be something of a watershed. Although property and cash equivalents remain the largest components of portfolios, the prospects of diminishing returns from real estate investments and lower rates on deposits have prompted wealthy South Koreans to expand the investment horizon across various financial assets, according to Hojune Chang, head of wealth management at Standard Chartered Bank Korea.

“For example, they have turned their eyes to various global assets including equities and fixed income in developed markets, with a shift in their focus from a few selective assets to a broad range of assets at a portfolio level,” he says.

Investors have started expanding into areas such as dividend-yielding equities, global fixed income and multi-asset strategies, he adds. “This change has been more evident recently as the global financial markets have continued to witness volatility every two to three years, which encouraged investors to approach their investment at a portfolio level in an attempt to mitigate volatility and seek return from various opportunities,” says Mr Chang. 

Citi also claims to be seeing an increased interest in global investments such as offshore mutual funds, as investors realise they can achieve stable returns through globally diversified investments. “As wealth managers, our focus is to understand the needs of customers and to build investment portfolios with the appropriate level of diversification across different asset classes and geographies in order to achieve those objectives,” says Mr Valderrabano.

Yet the love affair with property is far from over, according to Edward-Kwonseok Son, senior manager at KEB Hana. He says that according to the bank’s research, allocations to the asset class have rebounded in the past few years. “We estimate that it comes from the effect of various government measures aimed at spurring the real estate market, such as an increase in apartment redevelopment activity and interest rate cuts,” he says.

Political tensions 

Newspaper front pages and TV networks across the globe have been following closely the increasing tensions between North Korea and its southern neighbour, along with the “fire and fury” response from US president Donald Trump. With North Korea’s nuclear weapons programme advancing faster than expected, along with rapid improvements in its missile technology, surely South Korea, being the nearest country likely to be affected, would be in a state of near panic?

“It is true that the Korean peninsula is facing higher-than-usual tensions, but not to an extent that affects the behaviour of Koreans,” says Mr Chang at Standard Chartered. Neither is this likely to accelerate the search for safe assets or increase exposure to global assets among wealthy investors, he says, as local investors have experienced the many instances where apparent tension does not escalate into an extreme outcome. Indeed, financial markets have tended to suffer only from relatively short-term volatility when geopolitical issues have heated up (see chart).

“Most high-profile events concerning North Korea have had an immediate negative impact on the stock market, but it has gone on to recover within a week or so,” says Jinhee Suh, head of the global business division at Korea Investment Management, meaning that both local and foreign investors consider these events to be opportunities to pick up assets at bargain prices. There is even talk of a big surge in the equity market should the situation resolve itself.

“It might be an outside chance, but if we see [North Korean leader] Kim Jong-un and Donald Trump sign a peace agreement, another big jump in the market can be expected,” she says – though admitting this outlook is “a bit too optimistic”.

Tech battles

Technology is another battleground for wealth managers, as it is across the entire South Korean financial landscape. The incumbents have recently had to contend with the emergence of internet-only banks, the first of which was K-bank, which officially opened in April, and Kakao Bank, which launched shortly after.

“These internet-only banks have attracted many customers in a short period, offering high interest rates on savings and low interest rates on loans,” says Jiyeon Lee, manager at Shinhan Private Wealth Management. In response, existing banks are expanding their online banking, cutting branch numbers, and striving to expand their presence in the wealth management business, she adds.

Although wealthy clients still prefer to meet their private banker in person rather than through digital services, fintech is advancing so rapidly that ever more clients will turn to digital wealth management services in the near future, Ms Lee predicts.

Anticipating this change, Shinhan launched its M-Folio mobile robo-adviser service in November 2016. With a minimum investment of Won100,000 ($88), this is also bringing portfolio management services to a wider audience than the bank previously catered to.

The move appears to have been a success. By May 2017, 198,000 customers had used M-Folio, with 106,000 new fund accounts opened. The service offers two types of portfolio – one robo and one led by an investment manager, with 77% of customers using the portfolio proposed by the robo-adviser, considerably higher than the 23% who chose the portfolio recommended by human experts.

Hybrid model

Although KEB Hana sees the undoubted potential of technology in furthering client relationships, and admits to being surprised by the momentum gathered by its own service, HAI Robo, the bank is quick to emphasise the importance of having a hybrid model that allows clients access to digital tools for self-investing but that can also tap into human advice when necessary.

“It is about combining the best of both worlds: the low cost and access of robo-platforms with an adviser’s expertise in handling more nuanced or complex investing scenarios,” says Mr San.

With the average age of KEB Hana’s private banking clients being a relatively advanced 65, the widespread adoption of technology appears to be one way to bring a younger generation into the fold.

“Robo-advice offers easy access to financial advice for a large number of small-ticket investors and digital millennial generations who have been marginalised in the wealth management business,” says Mr Chang at Standard Chartered. The bank launched these services in Singapore earlier in 2017 and is reviewing a rollout in other markets, including South Korea, in order to expand coverage of its specialised services from a selected group of high-net-worth individuals to a greater range of investors.


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