Question

1) Which is not a reason for the low penetration of discretionary product in Asia Private Banks? A) Mainly Entrepreneurs /Major business owner B) RM turnover and compensation C) Less developed capital markets D) Mainly inherited wealth E) Short-term view

2) Which of the following asset class pairs has the lowest correlation:

1. US treasury and Investment Grade Bond
2. HK stocks and China Stocks
3. Emerging Market Equity and Gold
4. REITs and Property Stocks
5. Mid Cap stock and High Yield Bond

3. In the consideration of wealth planning, what are the benefits of a PIC (Personal Investment Company)

1. Limited Liability
2. Asset Consolidation
3. Ownership transfer
4. Non-disclosure of beneficiary
5. Facilitate succession planning

a) I, II, III and V

b) II, II and III

c) II,III and IV

d) I, II,III and IV

e) All of the above

Answer 1

1) A) Mainly Entrepreneurs /Major business owner is not a reason for the low penetration of discretionary product in Asia Private Banks.

Discretionary portfolio management (DPM) / wealth management is a very flourishing business for the private banks. However, the Asian Private Banks are lagging behind their European or American counterparts on this front. Private banks are only beginning to take hold in the Asian market, managing about 15 to 20 percent of all HNW assets. In fact, many customers today see Hong Kong and Singapore as natural alternatives to the more traditional offshore private banking centers (e.g., Switzerland).

One explanation for the low penetration of discretionary product in Asia Private Banks is that private banks’ cost to serve has increased significantly due to rising RM compensation, paired with lower RM productivity and higher servicing requirements. Adding to this, more stringent customer-suitability checks is leading to greater servicing requirements, increasing compliance costs. Despite relatively low returns, the potential of Asia’s private banking market, especially in the onshore High Net Worth segment , is strong.
The rapid economic growth in the Asian region has been fueled largely by the growth of small and medium enterprises (SMEs); as a result, it has been estimated that over half of all HNWIs in Asia today are entrepreneurs. In addition, SMEs contribute over half of GDP in some of the region’s major economies including Japan, China, and Taiwan. There is tremendous opportunity in Asia due to these entrepreneurs and HNW individuals, as a significant portion of entrepreneurial assets are still kept onshore, although offshoring continues to be common for these business owners due to their offshore business needs (e.g., setting up a trading company in Hong Kong). Given the importance of the entrepreneurial segment, many private banks are still exploring different approaches to supporting it, e.g., providing services that cater to both personal and business needs.

2) C) Emerging Market Equity and Gold - has the lowest correlation.

Even though gold bullion is technically not a fixed income, its behavior as an asset class is more similar to a fixed income than traditional equity. Gold bullion is different from a traditional fixed income asset because it does not pay a yield periodically. Gold has the unique ability to derive intrinsic value from its scarcity, rather than being an asset whose value depends on other assets. This uniqueness makes gold a very attractive asset class.

Gold investments have price movements that are independent of most other assets listed on a stock index. In general, the correlation between gold and the stock market, and other equities is very low. As such, experienced investors add gold to their portfolio to ensure portfolio diversification. In times of a stock market downturn, gold exhibits little correlation with adverse conditions. Due to this slight positive or negative correlation, gold prvides general insulation & this is what makes gold a lucrative asset to hedge against bad returns from other asset classes.

3) The benefits of a PIC (Personal Investment Company) are :- a) I, II, III and V

i.e.

1. Limited Liability
2. Asset Consolidation
3. Ownership transfer
4. Facilitate succession planning

Instead of holding investments personally, there are numerous advantages of using a personal investment company (PIC) to retain and grow family wealth. The PIC can retain profits for investment rather than those profits being drawn out and being subject to higher rates of personal tax chargeable on the shareholders. The PIC can invest in a range of investments including cash, shares, investment funds and property. The investment company can be used to fund retirement . An individual can lend a sum of money to the PIC for investment and if at any time, the individual requires some of the money, it can be paid back tax free to that person. A PIC can allow investment growth to fall outside an estate for inheritance tax purposes thereby resulting in a 40% tax saving. Seamless transfer of wealth, asset preservation, consolidation, separation of ownership from management and tax neutral structure are other elements of a PIC. It helps to transfer wealth to the beneficiary.