Despite a challenging environment that continues to affect the macroeconomic outlook, Hong Kong’s private wealth management (PWM) industry is firmly in growth mode, with institutions viewing mainland China, the next generation of clients, and environmental, social and governance (ESG) investing as the main growth drivers, a new study finds.

Net fund inflows reached HK$656 billion (US$84.25 billion) in 2020, which, combined with a 17.5% return on assets, led to a 25% growth in assets under management (AUM) to HK$11.3 trillion last year, according to data from Hong Kong’s Securities & Futures Commission.

The sixth annual Hong Kong Private Wealth Management Report, jointly authored by the Private Wealth Management Association (PWMA) and KPMG China, finds that a majority of the surveyed PWM institutions expect AUM to grow by 6-10% per annum over the next five years as a result of significant new opportunities, slightly above last year’s expectations.

“Hong Kong remains one of the world’s most robust private wealth management hubs and I’m extremely pleased to see the healthy growth of the industry in recent years. Mainland China has continued to be a key priority for our members, particularly with the launch of the Wealth Management Connect pilot scheme. We look forward to engaging with relevant authorities on how to expand the scope of the pilot scheme in the future,” says Amy Lo, chairman of the PWMA executive committee.

Currently, 41% of the industry’s AUM is sourced from mainland China, versus 40% in 2020, according to the survey. Survey respondents expect this figure to further increase to 51% in five years.

Apart from mainland China, targeting the second (or third) generation presents the biggest opportunity for the Hong Kong PWM market to grow, according to 85% of the surveyed member firms.

“Servicing the next generation is clearly a major opportunity given the significant transfer of assets we are seeing between generations and the enormous wealth creation among NextGen entrepreneurs,” says PWMA chief executive officer and managing director Peter Stein. “Through our training and recruitment initiatives we try to support our members by helping them develop the talent they need to service this younger generation of clients.”

The report also finds that the investment appetite of high-net-worth (HNW) clients has been expanding. Currently, only 6% of the surveyed member firms have more than 10% of their AUM in ESG investments. However, 72% of the respondents believe that in five years more than 10% of their AUM will be in ESG investments, indicating a significant shift in the medium term.

Of the surveyed PWM firms, 69% say their clients are increasingly interested in cryptocurrencies such as Bitcoin and other virtual assets, though portfolio allocation to this asset class has remained fairly low at the moment.

For the next 12 months, 42% of the surveyed HNW clients believe that their risk appetite has significantly or slightly increased across all asset classes, compared to 29% in 2020.

Paul McSheaffrey, partner, financial services, Hong Kong, at KPMG China, says: “The Covid-19 pandemic has shed light on sustainability issues and raised private investors’ desire to align their portfolios with their own values. While many choose to play a role in addressing social issues, the heightened demand for ESG investment products from private wealth represents a significant growth opportunity for private banks in Hong Kong, Asia and globally.”

Attracting more family offices to set up in Hong Kong (73%) continues to be another important area for growth for the PWM industry. Survey respondents suggest that more regulatory clarity and the introduction of tax incentives will help attract family offices to the city.

The challenging regulatory environment remains one of the biggest concerns for Hong Kong’s PWM industry, the study finds. “Know your customer” and anti-money laundering rules, sales practices and suitability are cited as key pain points for both institutions and their clients. However, interviewees do acknowledge the efforts of the regulators in Hong Kong in seeking to balance growth and investor protection. There is also an opportunity for PWM firms to trial or adopt regtech solutions to enhance risk management and compliance, reduce costs and improve customer experience.

The supply of talent in the industry has grown at a slightly faster rate in previous years, with relationship managers (RMs), product specialists, and IT and digital specialists viewed as the key roles where gaps remain. Interviewees point out that while the overall supply of RMs may be increasing, this is likely to consist of younger, less experienced talent, as they have observed more senior RMs retiring early or leaving the industry altogether.

Focusing on creating attractive remuneration packages and resolving administrative inefficiencies, as well as on providing opportunities for personal development, will be essential to attract and retain top RM talent, according to the study.

The Hong Kong Private Wealth Management Report is largely based on an online survey of PWMA member institutions and a client survey, as well as interviews with industry executives, regulators and other industry stakeholders in Hong Kong. Both surveys were conducted between June and July 2021.