Indonesian banks must target the country’s growing middle class if they are to build a sustainable onshore wealth management industry.

In addition, the country’s regulators should loosen restrictions on how much domestic mutual funds can invest offshore – doing so may eventually entice some of the country’s high-net-worth (HNW) and ultra-high-net-worth individuals to invest locally.

Most wealthy Indonesians prefer to park their money with foreign banks, with Singapore the most common destination. UHNW Indonesians – those with $30 million and upwards in net worth – account for 5% of Singapore’s UHNW population, according to the UBS World Ultra Wealth Report 2013, a joint study by consultancy Wealth-X and UBS.

HNWIs have more investing freedom in Singapore than in Indonesia, largely due to rules put in place in 2006 by the latter country's markets regulator, Otoritas Jasa Keuangan (OJK) – these prohibit onshore mutual funds from investing more than 15% offshore. That is a tight leash, and could be the main reason why local mutual fund penetration remains low – only 200,000 Indonesians are invested in mutual funds out of a population of 250 million.

Michael Tjoajadi, chief executive of Schroder Investment Management Indonesia, argues that mutual funds should be allowed to invest up to 50% in offshore assets, which would allow for better diversification, which benefits the fund manager and investor.

Yet, ultimately, the answer to building up the onshore wealth management industry lies not with the country’s super-wealthy, but rather its rising middle class.

Johanes, Jakarta-based head of liabilities, investment and bancassurance products at Commonwealth Bank Indonesia, says the growing middle class has made an onshore private banking services industry not only more appealing, but also neccessary.

“It’s only recently that banks have started to look at the lower segment – call it the emerging affluent or mass affluent,” says Legowo Kusumonegoro, president director of Manulife Asset Management Indonesia.

“We really want to build our client base into a sustainable business,” he adds. “And as we look into the emerging affluent segment, they have the potential to be high-net-worth investors in the next 10-15 years.”

Still, the onshore wealth management industry is still in its early stages. Minimum investment amounts vary from firm to firm for mutual funds, but sources say 10 million rupiah ($879) is fairly standard. This is still quite high, considering the country’s average annual per-capita income is around $4,000.

And even for those with enough spare money to buy investment products, the mindset to do so is often lacking. The decent returns that have long been available from bank deposits will have contributed to this, but they are not the only issue.

“We need to really nurture this [emerging affluent] segment, provide them with proper education, such as knowledge of investment, the concept of pay yourself first, [then] think about your future, asset allocation, rebalancing your portfolio,” Kusumonegoro says. “It’s a big challenge."

Educating Indonesia’s young population is key, agrees Tjoajadi. “It’s part of our service to our clients. We work together with our distributors to educate them. We’re trying to get the investors to identify what their financial goals are and how they can meet them.”

*See the latest (October) issue of AsianInvestor for a feature on wealth management in Indonesia.