In the Press
19 December 2011
Wealth Management In Australia: Mining A Rich Seam Of Asian Growth
Max Skjönsberg
Wealth Briefing Asia
Australia's high net worth market is severely underbanked - with a pool of $600 billion in HNW wealth, only around $120 billion is in the hands of wealth managers, according to the country’s Private Banking Council, presenting a huge opportunity for investment managers.
“The profile of the private banking industry is growing, but we still hear high net worth individuals say, ‘I have no idea what a private bank is’,” Alan Shields, director of the Australian Private Banking Council, told this publication. “Just fewer than half of all high net worth individuals have a private banking relationship, so the penetration is not as high as you would expect.”
Shields thinks that the fact that a lot of the wealth is self-made is a strong reason why a lot of it is outside the industry. “On the road to wealth they have already developed relationships with accountants who become their trusted advisors,” he says.
A large proportion of the wealth creation in Australia is new money coming from China’s and India’s appetite for commodities and the country’s booming mining sector has fuelled the growth of the ultra high net worth population. The country has now 2,740 people with more than $30 million in investible assets, according to a recent study from Wealth-X, the Singapore-based research house.
“The ultra high net worth individuals here are more like [the ones] in Asia [than in Europe], they are the ones who have made the money and are generally younger,” says William Hamilton, general manager of wealth services at NAB Private Wealth.
A maturing market
Hamilton says that the wealth management industry, which is by far the biggest in the Pacific, is still in development: “Five years ago, I would say it was an immature market, but now it is maturing and it is growth market,” he says.
A major challenge, according to Hamilton, is the character of Australian clients, which makes it difficult to steer them onto the often small-c conservative path of wealth preservation. “Here we are dealing with individuals who have been incredibly entrepreneurial in getting where they are today, but what to do with the money they’ve made is something new to them,” he says. “For that reason, education is crucial.”
Hamilton’s institution (National Australia Bank) is one of the big four who together have about three quarter of market share in private banking. The others are Commonwealth Bank, Westpac and Australia and New Zealand Banking Group.
“I moved here eight years ago, and I think the market has changed dramatically,” says Shields. “There are new players in the market and almost all of the big private banks have refocused their models to incorporate a larger wealth element and moved from what used to be red carpet retail banking to a much more holistic wealth management operation.”
“But it is not mature, if they sat back now and said they have done it, they are kidding themselves,” he says.
Higher taxes for foreigners
The strong economic growth in the emerging economies of Asia is benefiting the wealth management industry in more than one way. Apart from indirectly by keeping up demand for commodities and benefitting the economy and creating wealth in the economy as a whole, many wealthy Asian families migrate to Australia, according to Hamilton, as education and higher living standards are attracting Asia’s affluent.
However, foreigners in the country are subject to a higher income tax. In the top band, foreigners pay A$60,630 (about $60,500) plus 45 per cent on income over A$180,000, while Australians pay A$54,550 before paying the same rate on income over A$180,000.
There is also a special “flood tax” after the disaster that caused havoc in much of the state of Victoria and notably Brisbane in January 2011. Top earners pay A$250 plus 1 per cent on income above A$100,000.
According to a spokesperson for the Australian Taxation Office, the government body has a strong focus on what they refer to as “highly wealth individuals” (same as UHNW), a group from which they raised A$800 million in income tax last year. “Although much of that remains in dispute,” the spokesperson said. “This year we will [have] complete[d] more than 380 risk assessments and reviews and 60 audits of these highly wealthy individuals.”
The tax authority does not see as much risk in the next group of “wealthy individuals”, which they define as people with net wealth between A$5 million and A$30 million.
At 30 per cent of GDP, the tax burden in the country is at about the same level as in Switzerland and smaller than in the UK and most other countries in the Europe. There is no tax on wealth, estate or inheritance.
Investment in retirement funds
If mining and high commodity prices are the main drivers behind wealth creation in Australia, the government’s retirement funds scheme, the world’s fourth largest with funds worth about A$1.3 trillion, is undoubtedly the main investment vehicle.
“Most of the money in superannuation would go into what we called balanced funds, where there is allocation into Australian equity and obviously they have mining in them because Australian companies are among the biggest players in the market,” says David Lees, general manager of superannuation and Investments of BT Financial Group, a subsidiary of Westpac.
“But portfolios are far more diverse, with fixed income and international equity,” he says. “Pure commodity is a rarity, but we do put it in because we see it as a way to find Alpha.”
Australia’s superannuation scheme was created in 1993 and it makes it compulsory for each citizen to save 9 per cent of his or her salary towards retirement. Shields from the Private Banking Council describes it as very important for the high net worth industry despite its illiquidity as it is the most tax-efficient investment vehicle in the country.
One of the tax benefits is that individuals can contribute up to A$150,000 after tax so that the earnings will be taxed at a rate of 15 per cent rather than the income tax rate which is likely to be much higher.
A super-fast growing market
The government has recently legislated to increase the compulsory contribution from 9 to 12 per cent, which according to Lees will mean an extra inflow of funds worth A$100 million each year.
There is no question that high net worth individuals are happy to invest in superannuation.
However, in 2007 the government introduced a A$50,000 cap on how much for people under 50 years old could put in at the tax rate of 15 per cent, and in 2009 it was lowered to A$25,000. This led commentators to speculate that high net worth individuals would take their money elsewhere, but according to Lees those have been proved wrong.
The value of the so-called self-managed funds, where most wealthy individuals belong, is today about A$397 million.
Lees believes that the importance of superannuation for investment in the country will increase: “In the next decade, 1.2 million Australians are moving into retirement,” he says. “There is currently A$1.3 trillion sitting in that system at the moment, when you fast forward to 2025, we will be expecting it to something like A$4.5 trillion. So there is a huge opportunity as the baby boom generation in the Australian context moves into retirement.”