One reason the term “Asian Century” has become so prominent is that enormous amounts of wealth have moved east since the turn of the millennium. According to consulting firm McKinsey, wealth in Asia Pacific (APAC) quadrupled between 2000 and 2020 and now represents 42%, or US$218 trillion.
As wealth continues to move east, the wealthy are looking to protect and grow their wealth, while the aspiring mass segment, predominantly the younger generation, is looking to achieve their wealth goals quickly. In recent years, digital transformation and innovative new business models have removed many of the barriers that prevent retail investors from accessing financial markets.
The number of retail investors, especially the younger ones, is proliferating. As this market expands, regional brokerages will increasingly dive into specific target segments.
At the same time, new digital entrants are putting enormous pressure on traditional brokerage firms across the region. Asia Pacific is also highly fragmented, with each market having its own regulatory framework, maturity level, and language, making it difficult for brokerages to scale their products and services.
Asian Retail Investor Types
Asian retail investors can be classified along three dimensions:
- Traders vs. Asset Allocators
- Millennials/Gen Z vs. Gen X/Baby Boomers
- Mass Retail vs. High Net Worth Individuals (HNWI)
In each of the dimensions, there is a spectrum where an individual can fall.
While these three dimensions are universal, the bias of where an “investor” will fall on each varies across markets. In the developed and aging Asia Pacific economies, there are likely to be more older, passive, and prosperous investors with low-risk profiles. In the region’s young emerging markets, such as Indonesia, there are likely to be more active Millennial/Gen Z traders who are tech-savvy and have higher risk profiles.
The time dimension is another essential factor when looking at Asian retail investor archetypes and their evolution. The overwhelming consensus from Kapronasia’s research is that an increasing number of younger investors have entered the market in the last two years.
The pandemic has accelerated both of these trends: the growth of the retail investor segment and younger investors entering the market. In fact, the most serious public health crisis in a century has fundamentally changed the way people invest, with digital modes becoming the primary way people want to handle and manage their money.
While younger investors may not contribute the majority of brokerage house revenue today, these individuals will be tomorrow’s earners. Therefore, brokerage firms must pay special attention to this segment and prepare to serve them in a way that matches their needs and requirements.
The cryptographic connection
Cryptocurrencies, as speculative as they are, appeal to young Asian retail investors who feel that certain avenues of wealth generation are closed to them. This is true in many Asian markets, from developing countries like Indonesia, where more crypto assets are traded by volume every day than traditional assets are on the country’s stock market, to developed countries like South Korea, according to one estimate, in 2021, one in three of the country’s citizens invested in cryptocurrencies or received payments in digital assets.
Without a doubt, the two largest countries in the region are not at all interested in cryptocurrencies: China and India. This is likely to be the case for a while.
However, many other Asian countries are more open to digital assets. But for brokerage firms, there is still a big problem to solve: the regulations need to be reviewed. This could change to some degree after the implosion of the FTX crypto exchange. However, brokers still need specific rules that allow fund managers to offer crypto asset services for retail clients. Brokerages in Asia could lose out without quicker regulatory action, given strong demand for crypto assets from young investors and their tendency to trade in currencies.
Demand for wider access
Another important regional trend, especially in developed APAC, has been the introduction of broader access to asset classes and markets. In the past, the region’s developed markets had limited options available to their customers. As the retail segment grew and became more critical and competition increased, these 14 brokerage firms had to begin offering a more complete range of products and markets to their retail clients.
The most common commodity sought by Asian retail investors in developed markets is equities, but the demand for funds is increasing rapidly. With that in mind, brokers have intensified their promotion of the benefits of investing in funds, and now people are interested in them, especially virtual asset ETFs. Some investors are moving toward mutual funds, spurred by regulatory changes that allow banks, post offices and broker-dealers to sell them.
Julien Le Noble, CEO of Singapore-based GTN Asia Financial, a trading and investment solutions fintech, argues for a broader offering. “Because young people are now so much more informed about financial services products being able to see everything and anything online and on the go, so they will want more from their trading or investing app. They’re ready for more than choosing Tesla and Google GOOG,” he says.
intensification of competition
The tumultuous economic conditions in 2022 have slowed down retail trading volume on global exchanges, which may indicate that retail investors are taking a wait-and-see approach to trading. However, retail volumes will inevitably pick up again, with increasing numbers of retail investors entering the market over the next five to ten years, buoyed by steady economic expansion and growing middle class.
The growth of the retail segment has also fueled increased competition as new entrants enter the market to serve this growing customer segment. That has led to a reduction in commission rates, which has lowered transaction costs for retail investors, making it even easier for them to participate in the market.
Competition is expected to intensify in the coming months and years, including from emerging technology companies. Many digital wallets now store their customers’ credit in a money market fund, allowing for a higher rate of return than a bank account, while allowing their customers to use it as such to receive and make payments. Both the super apps of platform companies and independent investment apps in Southeast Asia are now moving into wealth management as well, as banks in the region have not effectively stepped up to serve the needs. growing financial needs of Asia’s emerging middle classes.
Ultimately, brokerage firms want to continue to provide value to Asian retail investors. To do this, they must have the agility to quickly adapt and respond to a rapidly evolving landscape of changing customer expectations, increasing competition from new players, and new technologies. While today’s Gen Xers and baby boomers are the sources of income for most regional brokerages, brokerages need to keep an eye on the strategically important Gen Z and millennials.
With that in mind, brokerage firms should consider belonging to larger ecosystems that allow them to be ‘plug and play’ as providers or ‘as a service’ consumers. This would allow brokerage firms to offer these services to their end customers or integrate them into other value chains in third-party ecosystems.
While platform companies and other digital-first players have advantages in going digital, they lack the deep financial services expertise of brokerage firms developed over many decades of service. Ping May Saw, group director, strategy and analytics at CGS-CIMB, notes: “These new entrants are coming in with more user-friendly platforms, are strong in marketing, lower prices, but don’t exactly offer the best products or services that exist.”
The region’s traditional brokerage houses have an opportunity to fight back. The question remains, will they do it effectively?