In light of recent regulatory changes targeting the valuation methods of wealth management products, investors face a significant shift in mindsetThe traditional belief in rigid redemption—where promised returns are guaranteed—is being challengedAs banks transition to net-value-based products, fluctuations in their net worth will become more commonplaceInvestors must adapt to this reality by tailoring their investment choices according to their risk tolerance and the inherent risks associated with their capitalIt is crucial to acknowledge that high liquidity, high returns, and low risk cannot coexist.

On December 10, financial regulators issued a notice to banks' wealth management subsidiaries, mandating that these companies refrain from manipulating product net values through practices such as last-minute price adjustments, smoothing valuation methods, or using self-constructed valuation models

This notification emphasizes the need for wealth management companies to return any profits realized through irregular means to the original clients, and they must submit rectification reports within 30 daysThis intervention reflects regulators' increasing scrutiny of the growing trend toward self-constructed valuation models among wealth management firms.

Observers note that the implications of these regulations extend to all direct investments and outsourcing, forbidding any identified irregularitiesThe directive states that the latest valuations should stem from credible sources such as the Central Government Securities Depository and Clearing Co., Ltd., the China Securities Depository and Clearing Corporation, and the foreign exchange trading centerAsset management plans need to be transparently managed to ensure consistency in valuation principles, policies, technologies, and methods across similar assets held by the firm.

Additionally, these new regulations demand that wealth management subsidiaries undertake corrective measures to return profits realized through discrepancies back to the original clients and prohibit using these funds for promoting new products or exaggerated claims

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A monthly feedback mechanism on the corrective actions taken is also mandated as part of this new financial landscapeSeveral industry insiders have remarked that such measures are ultimately beneficial as they lead to a genuine market for net-value-based products, encouraging a fairer competitive environment.

The regulatory emphasis on net-value management comes at a crucial time when financial stability in wealth management is a pressing concernSince the start of 2024, authorities have tightened regulations on banking wealth management, necessitating that firms reassess their technical means of stabilizing net valuesKey aspects of these regulations include repercussions for using insurance asset management disguised as regular deposits for interest calculations, re-evaluating the reliance on trusts to adjust product yields, constraining non-compliant cash management wealth products, and halting improper innovations in financial products.

From a mid-term perspective, a research firm anticipates that wealth management within banks will grapple with the challenge of seeking certainty amid ongoing uncertainties

Investors, primarily characterized by their need for more assured returns compared to higher-risk investments, might find it harder to locate effective alternatives to traditional savings accountsAs regulators continue to tighten controls, higher risk equates to higher return characteristics, creating a complex scenario where perceived "genuine net values" likely generate increased volatility.

While the regulators have set clear guidelines prohibiting self-constructed valuation systems, this step underscores long-standing concerns in the realm of wealth management valuationsThis latest regulatory move addresses three primary concerns: closing price valuation, smooth valuation methods, and self-constructed valuation models.

Closing price valuation has quickly become a target for regulatory scrutiny

New rules stipulate that valuations should utilize updates from reputable institutions to ensure alignment across asset management schemes with consistent principles, policies, and methodologiesPreviously, directives issued by financial regulatory bodies in July 2024 had already warned against the provision of closing price valuations by trust companies collaborating with banks on wealth managementSuch actions are seen as camouflaging risk exposure and manipulative practices.

Smooth valuation tactics have drawn similar scrutinyOver the past two years, various wealth management products have resorted to employing trusts as conduits for investing in multiple products, averting volatility by channeling excess returns into trust plans, thus offsetting declines by utilizing these side pockets during market fluctuationsThis not only disguises asset risks but raises concerns about fairness among investors.

The third area of concern is the use of internally developed valuation models

While there was little formal oversight previously, discussions surrounding the legitimacy of unusual debt instruments prompted this regulatory interventionMoving forward, expect substantial guidelines mandating compliance across the board.

This combined approach to rectifying past infractions signifies a robust attempt to enforce asset management regulations while ensuring net-value management does not regressMonitoring will chiefly focus on closing price evaluations, smoothing trust arrangements, and self-constructed valuation schemes.

In terms of impact, the scope of corrective action can be recognized by evaluating the potential influence on wealth management products, where closing price valuations appear most concerning, followed by smooth valuation techniques and self-constructed models.

In the short term, expect that corrective measures may emerge within one month, providing a limited immediate effect

However, the confirmation of these measures will likely disrupt existing market conditionsAs the demand for genuine net values accelerates, the fluctuations in wealth management products’ worth become inevitable.

Considering the controlled scope of these changes, the constraints on many wealth management institutions choosing not to expand these valuation methods help stabilize net values even amid profit returns to original clientsThe influence of new regulations will ultimately depend on how wealth management firms adapt and respond to regulatory feedback.

Recent trends indicate that products characterized as short-term and open-ended have leveraged closing price valuations to yield returns, eclipsing cash management offerings without fluctuationsHowever, correcting these habits will simplify product offerings, potentially leading to reduced returns in exchange for increased stability.

Ultimately, the foundation of these regulatory adjustments aims to render the risk-free return more reflective of genuine market conditions, dismantling prior practices that allowed product yields to surpass returns from underlying assets.

Investors have shifted their focus more toward wealth management, especially after the rates on traditional savings have seen declines recently