[Editor’s note: This is a guest post from Tharon Smith, Managing Director of LendIt China. Tharon is an expert in fintech in China and is also the founder of Strontium Group, a firm specializing in cross border investing.]
Wealth management in China is growing rapidly. According to China Daily, total balances of wealth management products held by banks totaled 23.5 trillion yuan ($3.6 trillion) at the end of 2015. This is an increase of 56 percent year over year. The portion held by banks accounted for 26 percent of the total 90.36 trillion yuan for wealth management products held by other financial institutions.
Peer to peer lending companies account for the majority of non-bank financial institutions in China and most have transitioned to wealth management service providers. These firms prefer to be acknowledged as wealth management institutions and have practically insisted “P2P” is a bad word in the industry. This is partially due to companies distancing themselves from the bad actors in the space such as Ezubao, but these companies truly are starting to become more than p2p lenders.
The Wealth Management Specialists of the Future
They want to be seen as capital service providers, specifically wealth management specialists for the future, utilizing technology and reflecting the values of younger generations. To cater better to the Chinese market, the inaugural Lang Di Fintech conference we are hosting later this month focuses on much more than p2p lending.
Ru Bing, Chief of Wealth Management department of Creditease in a short conversation told me that the main reasons for this shift to wealth management are the following:
A single product such as P2P has never been a good way to attract clients.
Good quality P2P products are rare to obtain; as P2P concept is so competitive.
Wealthy clients have different tastes in investing.
Clients should have different asset classes in their portfolio for optimal diversification.
More products and cross-selling can help develop deeper relationships with clients.
As more wealth managers come online they will be challenged to develop these relationships with limited online products. Chinese internet based wealth management institutions will need to devise creative and unique investor relations activities in order to combat this challenge. Although, with respect to driving and developing deeper relationships with investors, China may have an embedded cultural advantage with norms such as “guanxi” and “saving face” that guide relationship building over the long term. How companies execute on this will indicate likelihood of success.
The Transition to Wealth Management Will Not Be Easy
In addition to developing long term relationships with investors, Chinese online wealth management companies will need to take actions to improve technical areas of asset management as the Certified Financial Advisors society pointed out in a recent report. Many investors expect a complete online experience and are willing to move on to a different provider should a company not meet their needs.
Companies focused on high quality wealth management should aim to provide appropriate strategic allocation across diversified products, mechanisms to avoid behaviorally driven mistakes, tactical adjustments, opportunistic investments, best-in-class investment managers and assets spanning different geographies. They should also help manage taxes, provide timely reporting as well as maintain discipline in market turbulence.
The CFA Society suggests further that the best wealth management companies need to be trusted to act in a client’s best interest, demonstrate the ability to generate high returns, show commitment to ethical conduct, develop business via trusted recommendations, maintain compliance with industry best practices, and manage the amount and structure of fees associated with service. Chinese P2P companies that are in transition to online wealth management will have some distance to cover before they achieve these goals industry wide.
Chinese platform RenRenDai has aggressively transformed to wealth management via its platform Wealth Evolution. Acting in the best interest of their customers RenRenDai has built an entire business dedicated to providing wealth management products online to investors who started as P2P investors. Wealth Evolution believes as disposable incomes in China rise along with the country’s economic development, the demands in wealth management service will also see a rapid growth. However, the demands are far from satisfied by the traditional wealth management institutions. People with different amounts of wealth have varied levels of access to wealth management resources. As a result, very few people are provided with high-end wealth management service while the majority of the Chinese population are deprived of such service even in its basic form. RenRednDai want to provide these services to everyone and make it inclusive.
SoFi is Leading the Way in the United States
Like internet finance companies in China, SoFi (short for Social Finance), backed by Chinese venture firm RenRen (not to be confused with RenRenDai), aims to provide a new banking solution for investors who demand a better product, better customer service and overall reflects the type of company future generations expect when dealing with financial advisors and money managers. SoFi offers wealth management services starting as low as $5 a month but is free for current borrowers. This is the first company in the US to transition from a marketplace lender to a full-service wealth management firm.
SoFi CEO Mike Cagney has said he wants to expand into:
Initiatives in wealth management, banking account alternatives — things that allow us to give a holistic solution [that will lead] people to leave their existing banking relationship and just work with SoFi.
Social finance in China has a deeper meaning, reflecting the fact that the majority of transactions are taking place within social media such as Tencent, WeChat, JD.com, and Alibaba Taobao. Innovative Chinese companies are building better financial products and services that reflect the social nature of commercial transactions and incorporate wealth management practices within these channels. The innovation in social finance reaches further into the nature of Chinese culture and community as they tackle the social nature of trust and building models for credit based on your social network online.
Chinese companies have an even greater opportunity to build these finance platforms for the future with larger sets of social data and analytics focused on credit, credit worthiness, purchasing trends, customer buying profiles, and overall commercial outcomes for decision making. Since China is not bound to the outdated system of traditional credit scoring, companies are able to build new models and craft more inclusive methods for assigning lending products and services on the borrower side.
The New Generation Has Different Expectations
Recently Deloitte reported on the 10 most disruptive trends in wealth management. They point out that the new generation of investors think differently about financial advice, they bring new attitudes and expectations to wealth management. Chinese investors still need to be educated on proper investment expectations, such as a more complete understanding of product offerings, complexity of monitoring and rebalancing of portfolios over time, and general understanding of the difference between guaranteed return and risk adjusted return.
Beginning with P2P investment products was a good place to start and now Chinese companies are paving the way for the future of finance through innovative wealth management platforms. The leading wealth managers of tomorrow in China could very likely have had their roots in P2P lending.