For most wealth managers, only the ultras count, while mere high-net-worth clients are shunted into generic investment buckets better suited to retail and core affluent clients. Tokenization could help.
In Asia, getting an adequately tailored portfolio for clients with less than $1-2 million in investable assets is almost impossible. Historically, because of the high costs, most institutions have focused, even preyed on, the coddled, ultra-high net worth segment.
A white paper published in November by Calastone, the world’s largest fund network, drafted together with HSBC, Marketnode, and Northern Trust, discusses a long and extensive laundry list of factors holding back service providers from effectively tailoring portfolios to those at the lower end of the market.
Prohibitive Costs
«Chief among these are the prohibitively high costs faced by asset managers across the region, which put true portfolio personalization out of reach for many,» the paper says.
That is a gaping hole, particularly given the HNWI segment is growing by 300,000 individuals a year, with $3.3 trillion in new assets out there for any institutions that can do a better job.
Periodic Culls
Despite that growth, HNWIs are either ringfenced with generic investment products or, worse, their numbers culled in periodic cost-cutting exercises.
All that has not been lost on many, with Calastone flat out finding out that 40 percent of HWNIs are «unhappy» with the level of personalization they currently receive.
HNWIs in the Middle
In the wider market, the average HWNI sits in a dubious no man’s land, perched underneath the highly sought-after regional institutional investor bracket benefiting from its tailored investment management support that often «leads the world in sophistication», Calastone emphasizes.
On the other end - 1.7 billion retail investors: «With a focus on simplicity and easy distribution through banking channels, investors with up to approximately $1 million are able to choose from a vast array of domestic and international fund vehicles, as well as from over 730 ETFs listed in Asian exchanges.»
Rare Species
Although HNWIs comprise a «growing body» of business owners and high-net-worth individuals, their specific needs are considered «sub-scale» for a significant proportion of asset management providers.
It is a significant market sour spot, given even those with $2 million or more in investable assets are also potentially too small for institutional-grade customization yet way too large for mass distribution channels.
Combining Both Worlds
«This raises a challenge and an opportunity for today’s asset managers – who are highly familiar with these requirements in an institutional context. Can they successfully combine the worlds of institutional and wealth products, so that they can offer the portfolio reach and strategy support that Asia HNWIs expect?» Calastone asks.
The Problematic Portfolio
A key part of the problem is that you can’t just bundle a bunch of curated ETFs with in-house products, which is something you might get away with in the US and Europe with the same kinds of clients.
According to them, Asia-based HNWIs have several pain points in their portfolio that are hard to ignore and get by.
Not Cookie Cutter
Typically, at the point of onboarding, they already have significant allocations to private and alternative assets that are not cookie-cutter enough to be coopted into a wealth management structure - or segregated properly.
As an example, Calastone says the private securities those clients hold can often be in local or family-owned businesses and that these are both highly personalized and specific to each market or region.
Outside the Limits
«These assets are inherently outside the limits of any standardized investment products today, requiring bespoke or manual administration (including not only reporting and valuations but also safe-keeping), often at a high cost,» Calastone indicates.
Then there is real estate, which they are also likely to have a substantial stake in.
«Similarly to private market securities, these investments are personalized, immobile and require a range of bespoke exercises to support their administration,» the report maintains.
Just About the KYC
Moreover, despite what many wealth managers say, few have an in-depth view of clients, even the UHNWIs, beyond basic asset allocation information and KYC data.
«As a result, these same wealth managers are today unable to define more precise criteria for portfolio customization, based on lifestyle or personal choices,» Calastone writes.
Glaring Gap
Beyond that, it seems that wealth managers themselves have no idea of their weaknesses in that respect, with 86 percent of them believing that they offer clients high levels of customization when it comes to investment management, something that only 60 percent of HNWIs agree with.
The gap is even more glaring when it comes to a fully customized portfolio, where about 48 percent of wealth managers believe they are doing great while only 10 percent of HNWI investors think the same way.
Costs Again
«More importantly, with 40 percent of investor clients considering their levels of investment customization to be low today, there appear to be around 660,000 investors in Asia today who are ready to see more personalization in their portfolios in the near future,» Calastone says.
But why is that? Again, costs: «The problem is that fund structures are more than twice as expensive to run in Asia as they are in North America – and they are hard to scale. With high start-up and ongoing operational costs, many Asia funds can cost hundreds of thousands of dollars to start and maintain, with little regional scale possible,» the global fund network writes.
Tokenization as Solution
According to Calastone, the answer could lie in tokenization. Digitalizing and automating a tokenized portfolio ecosystem would provide near-instant mobility and transfers of all types of assets, irrespective of where they come from.
They can also be fractionalized and held by multiple investors individually while manual processes are automated with smart contracts.
Natively Digital
«Under this model, investors’ underlying assets would be entirely digitalized – either in the form of tokenized (traditional) securities or as natively digital assets (including both cryptocurrency and natively digital securities such as government bonds or structured products),» Calastone says.
This would foresee exchanges and token providers supporting the tokenization of all different kinds of assets including private and physical assets, while also facilitating the issuance of native digital assets.
Not Theory
For their part, the wealth manager would continue to onboard clients as they do currently and provide regulated accounts and licensed investment advice.
«The personalized, tokenized portfolio is not a distant or a theoretical concept. On a global level, the tokenization of funds is now a practical reality, with over $800 million of investor flows into tokenized money market funds offered by Blackrock, Franklin Templeton, Fidelity, Abrdn, Wellington and others in 2024 alone,» the fund network writes.
Hard to Grasp
Still, that does not mean that there aren’t significant regional obstacles facing that kind of solution, particularly on the regulatory front and on the wealth management side, which has never per se been on the leading edge of financial industry technological transformation.
For both, a fully tokenized portfolio is likely still a difficult concept to even grasp, let alone implement, audit, and supervise.
