A new business model for Noah

The story

Noah Wealth Management was started by Wang Jingbo in China in 2005. A private banker, she foresaw that rapid economic growth would lead to the emergence of a large and fast-growing and relatively untapped market of wealthy individuals in China.

The challenges

At the beginning, one worry was whether a start-up could attract clients and product providers.

Ms Wang was also concerned whether Noah’s business model was sustainable. Unlike overseas private bankers, whose customers pay consulting fees, Noah charged the providers of financial products a standard rate of commission and fees. However, this business model was being discouraged by regulators as it incentivised wealth management companies to push products that offered them the highest margins, even if they were not the most suitable for their customers.

Noah also faced increasing competition from banks and trust companies’ own wealth management teams. They could sell their own financial products through their branch networks, which were often extensive.

The strategy

Ms Wang realised that Noah needed to open branches in a greater number of cities in order to reach more customers.

To fund this, she brought in two angel investors: a former client and a former colleague. Later, in March 2007, Sequoia Capital China, the venture capital firm, would invest $4.5m. The number of branch offices rose from 14 in 2008 to 57 in 2012.

Noah also needed to build trust with the clients and product providers. To do this, it turned its source of income to its advantage. it was able to lower the cost of negotiation with product providers, which also increased the value to clients by ensuring products were chosen because they met their needs rather than generating the highest commission to Noah.

The company also conducted rigorous risk assessments of all products before offering them to clients. In 2011, out of 1,000 products identified for consideration, only 76 were chosen.

The growing client base meant that Noah began developing new products, such as a fund of funds in 2010, which broadened its offering for customers and enabled it to cross-sell other products, such as high-end insurance.

Initiatives that would directly strengthen corporate culture and relationships with clients were also set up. Noah recruited relationship managers as direct employees rather than sales agents, which was the normal practice. They were chosen for their capacity to understand the lifestyle and needs of the client. The number of relationship managers increased from 192 in 2009 to 459 in 2012. Of Noah’s new clients, 60 per cent were referred by former clients.

Noah also invested in educating customers to adopt a long-term perspective on wealth management and encouraged them to participate in the decision-making process. The marketing department organised seminars and networking forums for current and potential clients. The result: Noah’s clients – comprising individuals, businesses and alliances – increased from 6,606 in 2008 to 40,305 in 2012. The average transaction value per client grew from Rmb3m in 2008 to Rmb6.1m in 2012.

By the end of 2011, Noah had become the largest independent wealth management service provider in China and had listed on the New York Stock Exchange. Its net revenues for 2012 were $86.7m, a 20.1 per cent increase from 2011.

The lesson

In 2005, private wealth management was a relatively new concept in China. Noah had to develop a model based on clearly offering a service to clients, and winning trust among both customers and product providers.

It achieved this by lowering costs, undertaking due diligence on products and introducing new ones, and both understanding and informing clients.

The writers are professor of entrepreneurship, professor of accounting and a case writer at Ceibs business school