Fertile ground
But that is not to say Capstone would not consider opening offices in jurisdictions with the right level of regulation.
In fact, the firm’s decision to set up offices in Shanghai and Kuala Lumpur was partly driven by the regulatory environment in the two cities, as well as their close ties with Hong Kong.
And while there is a large local market for financial advice in Asia, Capstone emphasises that this is not its niche. “It’s a competitive environment for insurance brokers, but we don’t see ourselves as competing against them because we are more of a wealth management firm,” Halley says.
Earlier this year, Capstone acquired an asset management licence, which gives the firm discretionary management rights on clients’ accounts.
This was a decision made by the directors after learning about the success of UK-based platforms such as Nutmeg, a business model Halley says is now seeping into the advisory process in Hong Kong.
This new licence, granted partly because of the firm’s use of technology, means the business now has three SFC licences to cover dealing, advising and asset management.
“It’s quite rare to get all these licences because you need suitably qualified personnel, which is the hardest thing because people don’t often have enough experience in the business for the SFC to trust them with the licences,” he says.
“Globally, there have been issues with product mis-selling, which has spurred regulators to ensure the adviser process is entrusted with qualified employees; and, of course, that’s the most important part – the people actually giving the advice.”
On the client’s side
Hong Kong regulators have certainly toughened up on advisory firms recently, most notably with the ban on indemnity commission brought in at the start of this year.
Halley thinks some advisory firms in the region will start to feel the pinch in their revenue from July onwards.
“What’s happening now is advisers and insurance broking firms are realising they have got no products to sell and are finding it extremely difficult to sell in the regulatory spaces.
“By moving into a fee-based SFC world, we are not bound by the new ILAS rules and the hugely complex application process,” says Halley, who argues that Hong Kong regulation is not necessarily stricter, it is just catching up with countries such as the UK and Australia.
“It’s been an evolution for our business because now we have got ongoing income from client accounts.”
However, he suggests the primary focus for regulators has been to stop long contracts for insurance-based products, rather than simply removing commission.
“Full liquidity is really important so clients can access their money at any time,” he says. “For us to make good money for our clients we need to have a good process in place, so we earn the right to keep them and not to contractually keep them by selling a product they can’t get out of.
“We basically sit on the same side of the table as them and we are incentivised for them to do well.”
He adds: “I think what has been missing is that clients would sign up to something and wouldn’t know what they were getting into. We are trying to educate clients and create products that don’t have hundreds of little fees.”
Advice for all
And this approach seems to appeal to Capstone’s clients, many of whom fit inside the ‘mass affluent’ bracket, a sector Halley says is underserved.
“Some clients have gone through banks and been very dissatisfied with the service because the insurance products are never exactly what they are looking for. There are some expat benefits for some clients, but they are never really happy with a one-size-fits-all model.”
He says: “It all comes back to value and transparency; as long as they know what they are getting then they are happy. The cost is irrelevant.”
However, the introduction of its digital platform has meant Capstone can also offer its services to lower income clients, who it had previously been uneconomical for firms to advise.
“Financial advice should be there for everyone, and now it can be because all of the different laborious tasks are made much more efficient online.”
With the three founders combining their complementary skills in asset management, trading, wealth management and their knowledge of Hong Kong, Capstone is founded on a team that recognises the importance of forward thinking.
Seizing the initiative
“Every business has to evolve, but they shouldn’t be waiting on the regulators to make them evolve,” says Halley, before adding that Capstone had been surprised the GN15 regulation had not come sooner.
He also believes more change is yet to come, particularly around the sale of life products.
The company is certainly keen to stay on its toes and look out for changing trends, markedly with those technological drivers that have begun to steer the advisory industry in a different direction.
Historically, the industry might have been slow to embrace change, which Halley believes can either make or break a business. “The world is progressing, particularly the online side, which is changing the face of finance. As the industry evolves, businesses either evolve with it or die off.
“This is the future after all, so why not embrace it?”
