The wealth management sector is moving towards standardization


Opinion Leader: Fei Wu, Professor at Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University   On December 29th, 2021, the People's Bank of China issued the “Financial Practice Specification - Wealth Management”, which defines the standards of wealth management practitioners in terms of service process, skills, professional ethics and code of conduct, and competency evaluation.

This normative document has aroused heated discussion in the wealth management sector, to which its significance is self-evident.

For the first time, this Specification presents official and authoritative definitions of wealth management terms, concepts and clients. It gives a clear and complete description of the practice requirements for wealth management practitioners, especially their professional skills. According to this description, we can even derive a competency model for wealth management practitioners. In short, wealth management is no longer an industry without "threshold". Therefore, it urges the improvement of this industry specialization. The era of a mixed bag is declining, and professionals offering professional services will become the mainstream.

Secondly, the introduction of the Specification has started the trend of industry standardization. Looking at the evolution of the wealth management industry in the world, with the increasing complexity of demands and market expansion, it is an inevitable trend for the industry to become more standardized. Investment advisory licensing is a regulation for asset managers, based on the supervision of financial institutions, and aimed at improving asset allocation ability and driving healthy competition. However, this Specification pays more attention to the regulation of individual practitioners. Since the business launch and implementation of investment advisory institutions depends on their employees, it is obviously important to standardize their service process, skills, and codes of conduct.

Thirdly, based on past practice and experience, the document specifically classifies the client base of wealth management, and clarifies the corresponding skill requirements for employees serving each client group. This step-by-step classification of skill requirements also helps wealth management practitioners plan the stages and paths of their career roadmap. In addition, the Specification mentions the corresponding supporting examinations and qualification certification to help practitioners test and match the requirements of each stage, which is quite practical.

What impact will the launch of this Specification have on China's financial markets? How is there room for further improvement in the future? Here are some personal thoughts for discussion.

First of all, it is indicated in the Specification that "this document is applicable to banking financial institutions, insurance financial institutions, securities companies, trust companies, financial leasing companies and other financial institutions, as well as relevant personnel in front, middle and back offices who carry out wealth management services and relevant professionals involved in wealth management". It can be seen that this is a normative document based on client service of traditional financial institutions. This may be due to the fact that traditional financial institutions still have an absolute advantage in the weight of assets under management. 

However, in fact, the number of clients of many Internet-based wealth management platforms has exceeded that of traditional financial institutions. Therefore, should we also take account of the participation of third-party wealth managers and Fin-Tech service providers in the wealth management sector  as well as the employees of non-traditional financial institutions, independent financial advisors (IFAs), and other diversified practitioners? Referring to the history of wealth management in the world, we can see that IFAs are one of the most important wealth management service providers in the US market, with a high market share. This category of practitioners may also make great progress in China in the future.

Second, the launch of the Specification means that the standardization of wealth management sector has begun. Standardization itself has costs for institutions, which will aggravate differentiation among institutions. For medium and large wealth managers, standardization will further enhance their professionalism and client trust. Smaller institutions, especially small third-party service providers, may face more severe and imminent challenges. Does this mean that the market will be reshuffled in the future and there will be more M&As in the industry?

According to the experience of the US wealth management sector, it is important to drive the standardization of the wealth management industry by combining the role of financial planner with the model of the buyer's investment advisor. Since the 1960s, the United States has started the transformation from seller's distributor to buyer's investment advisor. Around 2000, the model of buyer's investment advisor "starting from client needs and charging at AUM" (AUM: Asset Under Management) was formed throughout the industry. When we talk about wealth management, the first thing we need to know is for whom to manage wealth. On this basis, we can talk about what skills are required and how to match needs with capabilities.

In addition to setting a bar, it is also necessary to pay attention to the role and responsibility of wealth management practitioners in clients’ financial education and financial literacy training. For example, according to the Health Index of Wealth of Chinese Neo-wealthy Group 2021 report jointly released by SAIF and Schwab, 66% of the respondents indicated that they had financial planning, but only 2% of them met industry standards in their understanding of financial planning. Among the people without financial planning, more than three-fourths thought that they didn't need financial planning with insufficient assets. This is a question of financial literacy. In the market, the people who can most influence the financial literacy of clients are these front-desk wealth management practitioners who directly serve clients. Therefore, it is also an essential duty of wealth management practitioners to sort out and establish a good financial investment concept for clients and strive to improve their financial literacy in day-to-day services.

On the whole, the introduction of the Specification is a critical start for the standardization of the wealth management industry. With the continuous improvement of supporting measures such as qualification examination and certification, a complete evaluation system for wealth management practitioners is expected to form. This will help improve professionalism of the wealth management industry.

(Author Profile: Professor Wu currently serves as Professor of Finance at Shanghai Advanced Institute of Finance, focusing on behavioral finance and private [family] wealth management. From 2004 to 2010, he taught at Massey University in New Zealand. He used to be Director of the Asian Finance Association and Special Editor of Economic Systems.)