Creating fair practices for Chinese investors

Too often, Chinese customers buy wealth management products without a real understanding of what they're getting into, according to Xiaoling Wu, deputy governor of the People's Bank of China. Wu was speaking at the Fourth Annual Executive Forum, hosted by the W. P. Carey School of Business and the Shanghai National Accounting Institute. To grow wealth management services in the next decade, she said, Chinese institutions would do well to clarify regulations, communicate with customers, and offer a higher level of service to China's new investors.

The mood was buoyant at the Fourth Annual Executive Forum, hosted by the W. P. Carey School of Business and the Shanghai National Accounting Institute, as 75 new graduates prepared to receive the W. P. Carey MBA and move out into China's ascendant economy.

Many may seek positions in wealth management services, a sector that will only grow in importance as China moves away from a manufacturing-driven economy. Xiaoling Wu, deputy governor of the People's Bank of China and one of the Wall Street Journal's "50 Women to Watch," is likewise optimistic, but she remains clear-sighted about the challenges that still face China's burgeoning financial services industry.

Wu maintains that while Chinese financial services are advancing at a quick pace, there is still much to be done. Wu drew on her many years of experience in the financial services industry to offer some words of advice to the new graduates in her audience. To grow wealth management services in the next decade, she says, Chinese institutions would do well to clarify regulations, communicate with customers, and offer a higher level of service to China's new investors.

Communicate with customers

Too often, Chinese customers buy wealth management products without a real understanding of what they're getting into, she said. Instead, they rely on the advice of credit officers in commercial banks, officers who may lack full understanding themselves. Small-scale investors are concerned with risk, but they may not realize that risk lies in different places for different products.

Some guarantee fixed returns, others guarantee security of principle. The differences are not always clear to the first-time investor. If commercial banks fail to inform the customers of the different levels of risk of their products, [customers] will think these products are backed by the commercial banks, and will hold commercial banks responsible for failure, Wu says.

The result is not only short-term loss, but also an erosion of consumer confidence. Clients are also likely to misunderstand regulations about contract termination. "Commercial banks are entitled to terminate contracts ahead of schedule, but customers do not have this privilege … customers find they are limited by such a contract clause and are not entitled to withdraw," she says.

Customers are exposed to "excessive risk," Wu concludes, and the results are not good for the banks, the customers, or the government. "When buying a wealth management product, [some] fail to fully understand the risk levels of these products or the return mechanisms of these products. Often banks fail to fully communicate with customers about the right level of risk in wealth management products" for their personal situation.

Define your terms

If Chinese investors are confused, it may be because clear distinctions do not yet exist between private placement offerings and public offerings. Currently, the financial industry offers many distinct account types under a host of different names. Commercial banks often confuse professional discrete account management products by inappropriately introducing them as one part of a commercial bank portfolio.

Wealth management products sold in the Chinese market often inappropriately straddle these two territories, doing a disservice to smaller investors. In order to treat all investors fairly, "banks should clearly distinguish public offering products from private placement products," says Wu. Private placement offerings are a "hot topic," Wu says, and in China, these offerings often inhabit a "gray area."

"In a mature market, wealth management [services] target wealthy individuals," Wu explains.

In the United States, for example, private placement offerings are usually reserved for those with net assets in excess of $300,000, whereas in China, investors with far less may be targeted for high-risk investments. Wu's advice? Any offering with more than 200 investors should be classified as a public offering and governed as such.

These public offerings would be forced to comply with existing information disclosure requirements for public offering products and they should not be advertised to the general public. "Commercial banks should strictly separate proprietary business from discretionary accounts. A lot of people think it is common sense and that this problem has already been solved. If you watch services at a retail bank, watch closely, and look at the advertisements posted in the bank headquarters. The boundaries are blurred in execution."

Maintain uniform standards

Another source of investor confusion is the profusion of financial institutions offering wealth management tools. Commercial banks, insurance companies, trust companies, and investment funds have all introduced WM products to the market. However, different types of companies still work under different regulations, something that may take investors by surprise.

Right now, "no uniform standard exists to govern the same type of products offered by different types of business," Wu explains. For example, limits on management fees, marketing tools, and fund size are applied differently in different countries. The fine-points of these differences are often lost on customers, for whom a wealth management tool from an insurance company is assumed to be the same as one from a bank.

"[Products with] the same legal basis should be regulated by a uniform standard," Wu argues, and held to the same criteria. Otherwise, unfair competition between financial institutions leads to confusion, where potential investors cannot truly compare like products side by side. As in many cases, the lack of management may be to blame.

Provide reliable customer service

Wu's core message is service. Financial industry advisors have a social responsibility to encourage prudent investment and protect customers from uneducated purchases and undue risk. To ensure China's future in the wealth management industry, the nation needs to train a large number of wealth management professionals.

"Quality of service depends on human resources," Wu says, but in China rapid growth in the discretionary account management business has led to a glut of under-trained professionals. As large numbers of consultants have rushed to fill the demand for wealth management professionals, financial institutions have taken on some staff members who lack both expertise and social responsibility.

Qualified wealth management professionals are also able to think creatively, Wu adds. Many in the financial industry cannot find their own niche market, so they offer the same "one size fits all" products to everyone. "This does not bode well for the future of the industry," Wu says, nor for an individual customer's investment future. It's up to China not just to train professionals, but to explore new products with distinct characteristics, then match those customized products to the right investors.

"Our stock market is developing very well," according to Wu, and in these heady days, investors are willing to ignore mounting conflicts, sit back, and enjoy a strong stock market. But, Wu warns, once the market begins to cool, practices like the ones she enumerates will start to generate real controversy. The nation's responsibility is to make sure wealth management professionals have the clarity and competence to do the right thing first.

Bottom Line:

• First-time investors in China must receive full disclosure in clear language to be fully aware of their rights and obligations. Full disclosure will increase consumer confidence.
• Chinese financial managers must differentiate between public offerings and private placements, and the latter should be offered only to clients who can manage the risk wisely.
• Clear, consistent investment regulations and well-trained financial management professionals are required to properly manage China's stock market boom.