Country focus

The Indonesian wealth market is likely to experience low demand for inheritance planning services over the next two years, despite 76.4% of the HNW population being aged over 50. Vania Goncalves investigates the market’s dynamics and highlights the significant opportunities available for wealth managers

The Indonesian wealth market is less well established than other wealth hubs in the Asia Pacific region, such as Singapore and Hong Kong. According to GlobalData, the market is characterised as being relatively underdeveloped, small and risk-averse.

The Asian financial crisis of 1997 and the global financial crisis heavily impacted high net worth (HNW) investors’ net worth, resulting in significant portfolio losses.

The market seems to be maturing, though, with investors showing willingness to invest. The decision by Standard & Poor’s ratings agency, in May 2017, to upgrade Indonesia’s sovereign rating to “investment grade” is expected to provide access to a wider pool of investors.

In addition, President Joko Widodo is trying to attract foreign investment by opening dozens of businesses to full and partial ­foreign ownership.

The Indonesian wealth management market offers significant opportunities, as a huge proportion of the HNW wealth remains unmanaged.

According to the GlobalData’s Wealth in Indonesia: HNW Investors 2017 released in June, 54.5% of a typical Indonesian HNW portfolio is not placed with a wealth manager, creating an opportunity for financial advisers to target this segment.

The Indonesian HNW population is dominated by men (88%) aged 51 or above.

Approximately 29% of HNW investors have accumulated their wealth through first generation entrepreneurship; in comparison to 25.9% through family business ownership; and 23.5% through inheritance.

With an aging HNW population, 56.3% of wealth managers expect pension-planning services to increase in the next two years, in comparison to 7.3% for inheritance planning services — nearly half of wealth managers also stated that current demand for inheritance planning is “very weak”.

According to GlobalData, few wealth managers in Indonesia offer inheritance-planning services, even though succession plans are critical due to the country’s flourishing levels of entrepreneurship.

This type of planning not only ensures the continuity of their existing clients’ wealth, but also allows them to build a relationship with the next generation.

Tax planning services lead the HNW investor portfolio (30.9%) and demand is expected to increase — 57.3% of wealth managers expect a demand for this service over the next two years.

The government’s tax amnesty saw about $330bn of assets coming back into the country and HNW investors are now looking for ways to structure their wealth onshore in a tax-efficient and lawful way.

Around 57% of the wealth managers surveyed for the report agreed that clients use four or more wealth management firms — in comparison with just 23% across the wider region.

A key point to note is that while a typical Indonesian HNWI uses at least three wealth managers for their investments, HNW investors place 57.4% of their managed wealth with their main wealth manager, meaning that relationship building is essential.

A lack of expertise (34.4%) and a lack of time (27.2%) drive investors choice to have their wealth professionally managed.

These factors, according to GlobalData, have to be taken seriously when engaging with Indonesian investors.

Even though the majority of a typical Indonesian HNW investor portfolio is not professionally managed, execution-only mandates (21.5%) and advisory mandates (17.2%) are the most sought among Indonesian HNW investors.

Execution-only mandates are driven by investments in non-financial assets, as HNW investors are likely to invest some proportion of their wealth back into their own businesses.

According to GlobalData, wealth managers with a strong corporate offering may be able to reach out to HNW investors and their business interests.

Overall, demand for all types of asset management mandates is set to increase in coming

years — 59% and 56.7% of wealth managers respectively expect an increase in demand for advisory asset management and execution-only asset management in the next two years.

An Indonesian HNW investor typically allocates 35% of their portfolio to cash, 30% to bonds and 29% to equities.

Approximately 76% of wealth managers expect demand for cash investments to decrease in 2017, as Indonesian investors diversify their portfolios away from poor cash yields affected by lower interest rates.

On the contrary, bonds and equities are expected to increase, with 98% and 65% of wealth managers predicting it.

They quote capital appreciation opportunities and asset diversification as the top drivers of additional equity demand.

According to the report, local HNW investors will be looking for capital appreciation opportunities in a period of reduced interest rates.

Bond investments are driven by asset diversification (40.4%) and risk-aversion (36.2%).

According to GlobalData, the importance of risk aversion as a driver for bond investments, in conjunction with the significant proportion of wealth allocated to junk bonds, suggests that investors lack an understanding of the potential risks involved in fixed-income investing — wealth managers must address this by educating clients.