Observations From a Trip to Japan

Five key observations on the market in Japan.

I recently spent a week in Tokyo visiting with wealth management clients and prospects, including banks, brokerage firms, and technology vendors. I’ve returned with some observations on the market:

  1. Wealth managers in Japan are moving away from commission-based sales of individual stocks toward top-down portfolio management. The mindset change is incomplete, however. Financial advisors still manage client assets in line with general risk and return parameters (i.e., mean-variance optimization) rather than individual investor objectives.
  2. Financial planning remains a novelty. Clients are reluctant to share their personal financial information or pay a fee for advice. Operational silos within large banks and brokerages inhibit the delivery of services beyond investments, such as credit or insurance.
  3. Demographic realities mean that Japanese investors tend to be older and less profitable. Retired clients favor the telephone over self-service via digital channels. These time-rich clients constitute a service burden to which there is no clear solution, given the limited attractiveness of robo-advice and online investing to this segment.
  4. Like in the U.S., financial institutions understand the workplace as a source of younger, mass-affluent clients. In contrast to their parents and grandparents, these individuals are digital natives. End-to-end platforms such as Morgan Stanley at Work, which combine employee stock plan solutions with online investing support, offer a template for growth.
  5. Corporate and individual investor interest in retirement savings has grown in line with regulatory support for defined contribution plans and tax-exempt investment savings accounts. Increased mobility in the Japanese labor market, particularly among younger workers, is making defined contribution and stock plans effective mechanisms for employee retention.

Top-down vs. Bottom-up

In the U.S., the shift from stock picking to holistic wealth management has taken place over four decades. Japanese wealth managers and their regulators will need time to tinker and innovate. Structure needs to be in place to turn savers into investors. The absence of a fiduciary standard for advisors has throttled the development of a fee-based, independent advice channel, such as those in the U.S. (RIA) or the U.K. (IFA). Incubators such as FINOLAB (at which I spent a morning while in Tokyo) can help nourish the skills of fintechs and other market newcomers keen to challenge or partner with the Japanese mega-banks.

Change must be bottom-up as well as top-down. Financial literacy levels among investors remain low. The value of planning-based advice is poorly understood, as is appreciation for high-growth asset classes, such as private equity, that are trickling onto the market. Education delivered to investors via digital and face-to-face channels will be a start but not a cure-all. Ultimately, it may take a sustained market downturn or crisis for Japanese investors to take a more assertive stance toward managing their wealth.