Taiwan's secret offshore billions lure wealth managers

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By:
Elliot Wilson
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The island state’s lenders and brokers are aggressively seeking out new wealth management opportunities across Asia as competition rises at home. Their strong brands and growing branch networks provide advantages, but can they really compete with global rivals?

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For Arthur Chen, the light-bulb moment occurred in a meeting with a European wealth manager. The chief executive of Yuanta Securities, Taiwan’s leading investment bank, had been asked to help with a specific trade.

“It was pretty routine,” Chen recalls. “A local businessman had recently emigrated to Australia; he wanted to convert a bunch of New Taiwan dollars into US dollars and fixed income products. For some reason, his bank couldn’t finance it all, so they came to us for help. 

“While we were doing our background work on the client, we uncovered his name – and we were shocked to find that he was a) our client, and b) had been on our books for ever. That caught our attention. So we started asking – why aren’t we managing his money and his needs outside Taiwan? Who else are we missing here?”

Yuanta tweaked its business model. The shift was simple but necessary. “A rich guy’s wealth might comprise real estate, deposits, and shares in Taiwan-listed firms,” Chen says. “If he has significant wealth, a lot of it will be held offshore – perhaps more than he has onshore. So we got more aggressive, talking to clients, figuring out how to convince them to put more of their offshore assets in our hands. Two years ago, we weren’t doing that as a point of strategy. Now, we are.”

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Arthur Chen,
Yuanta Securities

For Chen and his senior wealth management advisers that seems to involve an awful lot of legwork, tracking down Taiwan-born, high net-worth individuals (HNWs) and then pitching Yuanta’s case. 

When Asiamoney meets him on a bright morning in May, Chen has just flown in from Hanoi. Taiwan is historically the largest foreign investor in Vietnam. As of the end of May 2018, its leading companies had invested a total of $7.9 billion in the southeast Asian nation, according to data from Vietnam’s planning and investment department, putting Taiwan just ahead of Singapore ($7.6 billion) and Japan ($6.2 billion). In 2017, Taiwan businesses invested $674 million in Vietnam, 44% more than in the previous year.

And where Taiwanese capital goes, its creators follow. Chen describes a meeting three days earlier in the Vietnamese capital with a 72-year-old tycoon who was born in Taiwan.

“He moved there in 1985 with nothing,” Chen says. “Now he owns 12 factories that pull in annual sales of $1.8 billion, generating $180 million in income each year for his family.

“He’d always dealt with UBS offshore, but he met us and asked if we could open an account for him in Hong Kong. So we did – it took less than 48 hours, and now we are one of his offshore financial advisers.”

Late on the scene

Why did it take Yuanta so long to spot this golden opportunity? After all, it is a domestic frontrunner in investment banking and asset management. 

Yuanta Securities Investment Trust, a division of Yuanta Financial Holding, managed $11.1 billion in assets onshore in 2017 through its equity, fixed income and balanced funds – all locally domiciled – representing a market share of 14.3%. 

Cathay Securities Investment Trust, a division of Cathay United Bank, came second with a 7.1% market share.

Part of the problem for Yuanta is it arrived late on the scene. Restrictions that prevented local securities firms from offering trust services to wealthy clients, onshore or offshore, were only eased in 2009, and it took another two years for Yuanta to secure a much-coveted licence. Since then, business has improved dramatically.

According to data from the Financial Supervisory Commission, Taiwan’s main financial regulator, the total value of the onshore wealth management sector was NT$3.974 trillion ($133 billion) in 2017, of which NT$142 billion was managed via trusts by securities firms. 

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Yuanta’s trust services dominate at home, with NT$50.1 billion in assets under management at the end of 2017, mostly comprising mutual funds and structured products, according to Rick Chen, head of corporate planning.

Yuanta controlled 35% of the market last year, followed by KGI (with NT$27 billion in AuM and a 19% share of the market) and Mega Securities (NT$16.5 billion and 11.6%). Three years ago, Yuanta started developing its own wealth management services. According to company data, total AuM in its in-house products surged from NT$902 million in 2016 to NT$9.9 billion last year.

Local focus

The Taipei-based brokerage is not alone in realizing, albeit rather belatedly, that it is missing out offshore. To be sure, Taiwan has some very good wealth managers. Foreign peers have high regard for the job done by the likes of Yuanta, Taishin Financial Holding, CTBC Financial Holding and Fubon Financial Holding. 

“All are very disciplined in their channels, with talented and stable management teams,” says a foreign wealth manager.

But for years, their attention has been focused largely on the local market, perhaps for good reason. Taiwan, rich and highly developed, is Asia’s sixth-largest economy. Its 23 million people had more than $180 billion in AuM at the end of 2016, according to Taipei-based Keystone Intelligence. 

The island’s HNW population jumped 11.9% year on year in 2016 to 142,000 people with cumulative wealth of $464 billion, according to Capgemini’s latest World Wealth Report; in Asia, only Indonesia and Thailand outstripped Taiwan in terms of such a growth rate. 

“There’s always enough business here,” says one foreign banker. “But that means local players haven’t always been incentivized to prove themselves in other markets.”

That’s finally changing, and for two reasons. First, the offshore sector is simply too large to be ignored. Second, somewhat contrarily, Taiwan’s leading wealth and asset managers are being forced to tap into new markets in the face of rising competition at home.

Taiwan’s Securities Investment Trust and Consulting Association reckons the offshore fund industry, made up of assets and products that are domiciled or located outside the island, was worth $111.9 billion in 2017, up 8.6% from the previous year.

The scale of this offshore wealth reflects Taiwan’s curious place in the world, and the lengths that many of its companies must go to when buying or investing in foreign assets. The reason for this is the usual one, and it involves Taiwan’s inescapable neighbour. 

“To a large extent, the offshore industry in Taiwan has been driven by its political difficulties with mainland China,” says the Tax Justice Network (TJN), a London NGO that campaigns for tax transparency. 


They’d rather put their wealth to work with a UBS or a Citi than with us. They figure it’s safer that way, farther from prying eyes 
 - A head of wealth management

When China’s meteoric modern rise kicked off in the 1990s, Taiwan’s firms were mostly barred from buying shares in mainland-listed firms, or stakes in companies in sectors such as technology, finance and telecommunications. 

Their response was to hide in plain view by setting up offshore units in a third jurisdiction, most commonly the likes of Belize or the Marshall Islands, which double up as tax havens and are part of the dwindling clan of small sovereigns that still recognize Taiwan as a country. The total value of all assets held offshore by Taiwanese firms exceeded $200 billion in June 2017, up from $187 billion 18 months earlier, according to data from TJN.

For years, politicians and regulators in Taipei all but tacitly encouraged powerful local tycoons to put their personal wealth to work far from the island. The top rate of onshore income tax stands at 40%. But if an individual places some of his or her assets (property, corporate assets, stocks and bonds) in an offshore company, under the alternative minimum tax scheme, he or she pays a flat rate of just 20% on annual income of more than NT$1 million. So long as repatriated income does not exceed NT$6.6 million in a single year, the individual owes nothing to the treasury in Taipei.

The shroud of secrecy that cloaks so much of the island’s offshore wealth is well known at home, generating anger (among those who do not benefit from the rules) but little action. 

Taiwan ranked eighth in TJN’s latest Financial Secrecy Index, published in January 2018, marking the first time the island had broken into the top 10. Before 2015, it was not included in the annual ranking of the world’s most opaque financial markets, though only, officials at the NGO say, because “the data we could find on the country was too poor”. 

That secretive nature is at work everywhere. If all investments by local firms in Vietnam were properly tallied, including those made via third countries, the historical total would be closer to $10 billion, reckons Hou Wen-chin, director of the Ho Chi Minh City office of the Taiwan Trade Center.

This state of play doesn’t help domestic outfits like Yuanta. Their quest to track down wealth held in offshore business units is often hampered by the fact that some people do not want their assets to be found. 

“They’d rather put their wealth to work with a UBS or a Citi than with us,” says the head of wealth management at a Taiwan financial group. “They figure it’s safer that way, farther from prying eyes.”

Competition

At home, competition to manage that wealth has increased. Not so long ago, leading local money managers had the island largely to themselves. Then foreign fund managers saw the allure of tapping into a market with a gross savings rate in excess of 30% and per-capita income of $22,000. Taiwan ranked fifth – behind the US, Switzerland and Japan – in Allianz’s 2017 Global Wealth Report, with net per-capita financial assets of $109,128, up 9.6% year on year.

For years, foreign firms struggled to gain traction. Taiwan’s citizens preferred to use local names they knew and trusted, while financial regulators blew hot and cold, alternately beckoning foreign players in or finding new ways to keep them muzzled. But the evidence suggests that they are finally starting to be embraced by local investors. 

According to research firm Cerulli, four of the top 10 managers of Taiwan-domiciled funds in 2017 were foreign, with JPMorgan Asset Management in sixth place, followed by PineBridge Investments, Allianz Global Investors and Eastspring Investments. New York-based AllianceBernstein grew faster than anyone, with AuM at its equity, fixed income and balanced funds up 113% last year on an annualized basis, to $1.25 billion. 


There’s a lot of trust in our brand at home, and we believe we can convince some of this offshore money to be put to work with us 
 - Arthur Chen, Yuanta

Part of the reason for this turnaround is the island’s demographics. Taiwan is ageing fast: one in five citizens will be over 65 by 2026, making it, the interior ministry warns, a “hyper-aged” society. Under president Tsai Ing-wen, Taipei has made it a priority to develop a world-class wealth management industry to cater to its needs, and that means attracting foreign funds and talent.

No conversation in the capital is complete these days without a mention of this demographic bombshell. 

“The growing elderly population will change the demand and consumption habit for financial products,” says Bor-Yi Huang, chairman at policy lender Taiwan Business Bank. “Although senior citizens are more conservative in wealth management and investment, they have higher demand for nursing care and wealth succession products.”

Domestic financial groups may not like foreigners barging in and squeezing margins, but Taiwan needs their help. 

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Paulus Mok, Citi

“We have been operating here for a very long time,” says Paulus Mok, chairman and country officer at Citi, which introduced wealth management to Taiwan in 2001. “Maybe because we have been here for so long, and have a locally incorporated subsidiary, the authorities look to us for new ideas and innovation in areas like digitization.”

So what does the future hold? Can Yuanta and the other locals turn the tables on their foreign rivals, and convince Taiwan’s monied citizens to entrust them with the considerable wealth they have parked in Hong Kong and the Caribbean?

Perhaps. There’s no reason in theory why the big domestic names cannot pinch a flagship client or two from the likes of Citi and UBS. 

President Tsai’s New Southbound Policy aims to get more local firms and lenders to invest in south and southeast Asia. Yuanta now has operations in Indonesia and Thailand, and a joint venture in Vietnam. 

CTBC is a big player in Thailand’s financial sector, while the likes of Taishin and Cathay are actively looking for opportunities in the Asean, or Association of Southeast Asian Nations, region. As they push into new markets, they are making wealth management a priority.

Yuanta’s chief executive, Arthur Chen says the broking outfit isn’t averse to playing the loyalty card to drum up new business.

“If you’re a rich American and your money is being invested by UBS, and then a US bank comes along and says they can manage your money, you’re going to think about it, aren’t you?” he says. “It’s the same for us. There’s a lot of trust in our brand at home, and we believe we can convince some of this offshore money to be put to work with us. But we are the newcomer, so the onus is on us.”

Citi’s Mok reckons this approach could work. 

“They might have an advantage when dealing with Taiwan clients in markets like Hong Kong,” he says.

It will certainly be a test of Yuanta’s resolve and ambition. Its Hong Kong-based broking division, Yuanta Securities (HK), “is now our wealth management business and product hub, linking the markets of Taiwan, Hong Kong, Korea, Thailand and Indonesia,” says Rick Chen.

“It will leverage our strengths to provide clients with more diversified financial services, and to help us expand our reach and presence across Asia.”