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Building the digital capabilities to succeed in Japan’s wealth management sector

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This is a sponsored article from Avaloq.

Pascal Wengi, Managing Director for Asia Pacific, the Middle East & Africa (APAC & MEA) and member of the Group Executive Board at Avaloq

As the third-wealthiest country, Japan is uniquely positioned in the world economy. Yet, despite its wealth, the Japanese population is known for being extremely risk-averse. This, combined with the fact that older generations hold significant wealth in Japan, presents a considerable opportunity for the wealth management sector to evolve and innovate with a major generational wealth transfer underway.

In this Q&A, Pascal Wengi, managing director of Asia Pacific, the Middle East and Africa at Avaloq, delves into the challenges and opportunities in Japan’s wealth management sector and outlines the digital journey that financial institutions in Japan should undertake.

What are the main challenges and opportunities for the wealth management sector in Japan?

First and foremost, Japanese investors are among the most conservative and risk-averse in developed markets, preferring to hold cash and bank deposits. Despite being the third-wealthiest country worldwide, only a small portion of Japan’s wealth is managed professionally. Historically, there is little motivation for investors to pursue goal-based investment strategies due to the tradition of lifetime employment and a stable pension and welfare system. In addition, the country has unique demographic challenges, with over 70% of the nation’s wealth held by individuals over 60, many of whom may not be familiar or comfortable with digital devices or services.

Nevertheless, there are several notable opportunities in the Japanese wealth management sector. The recent acceleration of Japan’s inflation is eroding the value of cash-heavy portfolios, increasing demand for diversification and modern wealth management solutions. Additionally, the country’s wealth is gradually being transferred to the next generation, which is more receptive to using digital services to manage their assets. This demographic shift represents a significant opportunity for wealth managers to engage a new, digitally attuned clientele.

What are the key areas in Japan’s banking industry that need improvement?

Japan’s banking industry needs to invest in specialised wealth management platforms to encourage professional investment services. The retail-oriented platforms commonly used in Japan work well for simple transactions or brokerage business. However, they are unsuitable for supporting modern wealth management business models that involve charging clients a regular flat fee based on their assets under management, for example, which is the norm in mature markets such as the US and Europe. This requires a state-of-the-art wealth management platform for calculating and booking complex transaction costs, periodic recurring fees, and retrocessions.

Another critical area for improvement is addressing compliance challenges through automation. Since the 2008 financial crisis, there has been a global increase in regulatory initiatives to protect investors. Compliance with guidelines from Japan’s Financial Services Agency, including Principles for Customer-Oriented Business Conduct, remains a manual process for many financial institutions in Japan. With automated tools for reporting, banking employees can save time and focus on higher-value tasks such as inspecting potential compliance issues when flagged by the system.

What does Avaloq’s partnership with BlackRock mean for Japan’s wealth management industry?

By combining Avaloq’s core banking, client relationship management and mobile banking services with the Aladdin Wealth platform’s risk analytics and portfolio management capabilities, the two firms aim to deliver one of the most advanced technology offerings available to the wealth management industry. For Japan, this partnership means a seamless and deep integration of technology and services that reduce complexity and risk.

The partnership facilitates a unified experience across the entire value chain of a financial institution. Avaloq’s collaboration with Aladdin Wealth enables financial institutions in Japan to enhance their operations throughout the entire client journey, encompassing onboarding, portfolio construction, client reporting and risk management. This unified experience eliminates delays with multiple systems, allows for real-time order placement, execution, and reporting, and provides real-time investment office guidance to advisers. Moreover, it enables firms to remain on top of all necessary regulatory and compliance requirements with a common language across the platform.

Can you explain the digital journey for financial institutions in Japan?

The first step for financial institutions is to introduce a reliable banking operation platform that will help to establish or modernise their wealth management business. This platform should be scalable, flexible and capable of handling various financial products, services and regulatory requirements. Financial institutions can streamline their processes, save time, reduce operational costs, and improve efficiency by having a reliable back-end platform for operations.

The next step for banks looking to extend their wealth management and private banking offering is to meet the client demand for convenient, fast and secure access to financial products and services. Digital front-end, including robust client relationship management tools, web and mobile applications, and investment platforms are essential to accelerate sales and client interaction, so these solutions should be user-friendly, accessible across different devices and offer various channels for interaction with advisers.

For more information, download Avaloq’s report on the Japan wealth management market: https://www.avaloq.com/knowledge-hub/whitepapers/transforming-for-wealth-management-in-japan.

This is a sponsored article from Avaloq.

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