Investment Strategy of Wealthy Class, Soichiro Takaoka
What will be the investment strategy for wealthy class to make money most?
The author is the founder of the investment advisory firm that provides clients with advice on the neutral standpoint from the analysis of fund data base based on more than 100 thousand hedge funds. He looks into and explains in-depth theory and supporting spectrum of empirical data and facts of most rationally suitable investment strategy of wealthy class based on the evolution of investment management industry and environmental changes surrounding individual investors.
The book covers wide areas from evaluation of investment services and products on onymous basis, to the know-how of how individuals can utilizes the same investment strategy as have been supported by world wealthy classes and prominent fund management institutions, e.g., Harvard Management Company.
Column 1: The First Year of Joining MITSUI & CO. (1999–)
The company that I joined after graduating was a firm by the name of MITSUI & CO. The year was 1999 – a hard time for job seekers – and there was a constant media refrain of "Even Tokyo University graduates can't get jobs." However, after visiting various companies and offering my "selling point" of focusing on nothing but kendo for 12 years, MITSUI & CO. was kind enough to hire me. As I subsequently appeared in recruitment pamphlets aimed at new graduates and visited campuses to persuade younger students to join the company, I never in my wildest dreams thought that I would start my own enterprise at the age of 31.
When the HR person at the company's job placement interview asked me which section I wanted to join, I replied that I wanted to be assigned to where I could learn the most about business. As a result, I was placed in the International Business Control Department involved performing due diligence on business viability and risk when various divisions (such as energy, IT, and foodstuffs) were making overseas investments. My actual work involved creating proposal documents to be submitted at managerial meetings. Being a new recruit, I had people to mentor me. There was a mid-level employee who was a Harvard MBA graduate, a senior Chinese colleague, and a handsome, silver-haired Harvard AMP graduate who was my direct boss. Up until my transfer to the IT Business Division was approved in my third year at the company, my foundation as a business person was forged in the Department.
At the time, the boss would arrive at the office before anyone else and read the Financial Times (FT), using a red pen to underline the information that his subordinates should know. The FT would get handed around staff in order of seniority, so I would get to read it around 11 AM. For my job, I read material such as the financial documents of overseas enterprises and overseas financial reports, and it was all written in English. The people that I dealt with by email were also overseas, so naturally, the language had to be English. I am probably making it sound rather tough, but English books are actually easy to understand. The conclusion and main points appear first, so from a business perspective, I thought that English was easier.
A knowledge of finance, accounting, and law are essential for reviewing business investment and business plans, and I learned about these topics by reading famous books. In particular, Robert C. Merton's "Finance" is a famous work that provided me with an understanding of investment decisions, and I always recommend it when asked about good financial books.
When I was reviewing business investments, knowledge from textbooks was not the only thing required – a vast amount of practical intelligence was also essential. However, being a rookie, I had nothing. Though, I was lucky enough because it was 1999. Google just started in 1998. Several search engines had only just appeared at the time, and because the Internet was not awash with SEO content and a mixture of useful/useless information as it is today, helpful information from a well-known expert really stood out.
I noticed that if I searched in English, I would immediately find the business content I wanted. In addition, because the section that I had been posted to filed paper copies of the proposal documents from all past projects that MITSUI & CO. had actually invested in, I gained a knowledge of all manner of business in all manner of countries. I became absorbed in devouring information. Because of this, I was able to do my job.
Having been in charge in Europe market, I frequently exchanged e-mails with my London counterparty. And then rumors came out that there was a Tokyo guy who was making things done! They were more surprised when they found out I was really just a rookie. It was all thanks to the existence of the Internet and the stock of excellent knowledge from my predecessors provided by the bundles of documents filed away by my section.
In later years, I would start a business spanning and incorporating the fields of the Internet, finance, and globalization.
The splicing of the Internet and finance is now known as "fintech" (financial technology) and my conviction that the field would grow came from reading approval documents in that first year of entering the company, which provided me with a bird's-eye view of business overall.
As a contact point for the International Business Control Department, I talked to many senior executive managers and supervisors. All those who made strong business proposals which seemed likely to be profitable had an "aura" about them. Those who wrote poor proposal documents had absolutely no aura. My seniors expressed this as "those who smell of money, and those who don't."
I could try to list the various reasons, but I learned that it essentially came down to that a person in charge is evaluated by those around him based on whether he has any business sense.
It is not about whether someone is attractive or smart, it is about whether they give off a sense of “making money.” On the MITSUI & CO. HR evaluation forms at the time, there was an entry for “business sense,” making it a skill formally recognized by the company.
After subsequently launching my business, one year later, I had close to 500 million yen (USD5m)of funds from venture capital etc.
For the time, it was one of the precedents for large-scale capital procurement. One of the enterprises that provided funds was the financial unit of the head office of Tokio Marine & Fire Insurance (currently Tokio Marine and Nichido). The investment manager at the time said, "That President guy, he's a Super President. He reeks of profitability." For me, the memory of having been praised for having business sense is a more cherished memory than procuring the funds.
I also came to realize the power of a comprehensive judgment ability – what is known as "intuition" – in my first year at the company. The Energy Unit had created an approval document attempting to commence business with a desirable company. The company in question was at the cutting edge of its field, led by a president that was a Harvard MBA graduate and labeled as the smartest in the program. He was even highly praised in the Wall Street Journal, which led to a sudden upswing in the company's share price. The approval document was requesting permission to trade with this incredibly sexy company, so being the neophyte that I was, I added the comment "An excellent trading partner" to it and circulated it to upper management.
The head of the review section made the final decision on all matters, and he rejected the proposal instantly. When I asked the manager what his reasoning was, he replied, "Intuition." The Sales Division was in an uproar. Being new, I did not understand at all.
The company was Enron.
At MITSUI & CO., there was a person who made the company huge profits by going dramatically short or long on the dollar based on intuition, and that person would later change jobs and become a director of the Bank of Japan.
I was often told not to turn into a critic. Anyone can say something haughty or plausible. When I said that foreign capital consulting seemed pretty cool in front of a VIP, he replied, "The moment an outsider puts a business subject on paper, the business is already in decline. If you don't get the feeling that you're the only one accessing information only an industry insider would know, the information won't amount to anything real."
There were still a lot of people who smoked in those days. For some reason, Marlboro was the most popular. I did not smoke, but because I knew that various topics were discussed in the smoking room, I decided to start. Naturally, I chose Marlboro. BMWs were popular cars. The first car that I bought was a BMW. Blue shirts were en vogue. I wore blue shirts. After leaving MITSUI & CO. and setting up my own company, I quit smoking. I no longer drive a car and my shirts are white. As president of Hedge Fund Direct Co., Ltd., I analyze overseas investment projects, but that is the only thing that is the same as when I was in my first year at MITSUI & CO.
Column 2: Business Launch (2005-)
At the beginning of 2000, I was in my third year at the company and had transferred to the crown jewel of the company at the time – the IT Business Division. I had also been involved in the launch of new businesses, venture investment, and the acquisition and merging of companies worth tens of billions of yen. The acquisitions and mergers were seen as spectacular in the business community around me. After participating as the main player, an insider rather than an advisor, I came to feel that mergers and acquisitions (M&A) were merely exchange transactions in which cash on the balance sheet was swapped around with the results on the consolidated profit and loss account. There is no need for real ingenuity or effort to create customers.
Looking at the projects that I was involved in as well as other examples, there were few instances of M&A where a synergistic cost reduction based on economies of scale or a sales increase based on complementarity and cross-selling were actually achieved. Since share prices rise based solely on an expectation that a merger /acquisition will occur in the future it’s no surprise that managers of listed companies (commissioned to run the company by shareholders) resort to M&A. However, when two companies in the same industry merge, the only people who panic are those in middle management positions who do not want to lose their jobs; quite frankly, customers and the rest of society couldn’t care less. Through showy, high-end M&A work where vast sums of money move around, I also encountered the fictitious elements of business such as balancing the books, which made me ponder what the true essence of management is.
I also came up against a scenario in which restructuring was to be carried out after a merger in order to generate a profit. Since effort and ingenuity are required to increase sales, the easy way to generate a profit is to reduce the human resources expense. The management only makes a decision, those who handles slashing job processes are not them. However, those to be slashed have families. In general, cutting the workforce by roughly 100 people will produce a 1-billion yen profit. However, when a large company is involved, the paltry 1-billion yen gain from restructuring equates to very little return for shareholders. I do not deny that restructuring would result in some raise of “management remuneration”. But, is it really worth throwing 100 people out on the street and putting them lost in the middle of nowhere?
As a young business person carrying bags for head office superiors and the managers of affiliated companies, I inadvertently learned about investment and M&A from my surroundings, and I came to think about what the essence of true management is in my own way. Personally, I want to generate some kind of real added value through business. I want to enrich employees. I want to impact the world positively.
Around the same time, a new movement had started in Silicon Valley. It is said that the leading lights of mature developed nations are new venture companies, which will breed innovation and transform society. Although it is now said that half of Harvard MBA graduates launch a business within 15 years of graduating, the seeds from the new movement had just begun to flower and the focus of the U.S. elite was continuing to shift from big corporations to ventures. Internet-related companies were also being created in Japan and being listed on the Tokyo Stock Exchange's new Mothers Index. Although the founders of venture companies make big money by listing the company on the stock exchange, they are respected by society as this is viewed as compensation for creating new value and transforming the world. I sensed this tendency as I had contact with U.S. venture companies for work, and I was naturally drawn to venture companies.
After being assigned some company work in which I had to consider new enterprises, researching various types of statistics made me aware that the population of Japan had been decreasing since 2005. Japan was headed toward an era-defining turning point. Although large corporations have driven mass production and mass consumption in societies with growing populations, in a society with a shrinking population, the strains of a traditional society manifest and social problems eventuate.
I considered the solution to this problem to be a business opportunity. I was also approaching 30. Turning 30 means becoming independent.
In August 2005, I established Abraham Group Holdings (currently Ayumi Trust Holdings) in a one-room studio apartment with some friends.
Together with a foreign capital strategy consultant, a classmate from university, and an accountant I had met through work, I worked fervently in a cramped room with only a laptop and mobile phone.
When I tried to lease a photocopier, I was refused because my newly established company had no credit, and sales people trying to sell things would take one look at our office, make a sympathetic face, then immediately leave. But I worked tirelessly with my friends, who seemed to be enjoying these types of things, from early morning to well into the night, and it was a genuinely fun time. In those days, launching a company was rare, so there was a big article about me in Forbes Japan for no other reason than that I was 31.
The goal of the company was to solve social problems. The inspiration for the company's name was the scholar Abraham Maslow. Maslow proposed the "hierarchy of needs" theory, which posits that once humans have sufficient food, clothes, and shelter and they are socially accepted, they will ultimately develop a desire for self-actualization. Because a sense of self and self-actualization are the very things that people in a society with a shrinking population and an over-supply of commodities will seek, we reflected our intent to support that in the name of the company.
The biggest problem in Japan at the time was the recession. Dubbed "the lost decade," an air of hopelessness hung over the entire country and there was no vigor to be found anywhere, so I consequently zeroed in on the growing wealthy population. Approximately 20% of Japan's financial assets are held by the top 1% of the population; if these people are investing and spending vigorously, the entire economy will be stimulated. For our small company to have an impact on society shortly after its inception, I felt that if I targeted the wealthy, it would be possible to have a significant impact on society as a whole.
While the population of Japan may have been decreasing, its wealthy segment was increasing at about the same rate as China and emerging nations, and at the time, it was the singular promising area in Japan.
To research the needs of the wealthy, I lived in a luxury space in Roppongi Hills, tower condominium, around the time of the company's launch. At the time, IPO millionaires from IT start-ups and people from foreign capital enterprises who received huge bonuses would gather in Roppongi, eventually becoming known as the "Hills tribe."
I debuted in Roppongi at the invite of an acquaintance. Until then, the area around the Sony Building in Ginza, or from Otemachi to Jinbocho, had been my stomping ground; I had avoided Roppongi, thinking it was “dangerous”. I tagged along timidly and discovered a world of parties and being danced on by male and female entertainers and celebrities. Singers that I had seen on the very famous New Year’s Eve NHK TV Music Extravaganza, so-called “Kohaku”, and musicians that appeared on variety programs were there. At the center, you could find the distinguished children of the members of large corporate groups who had attended Keio elementary school for the children of the elite. These were the 20-something second- and third-generation business owners who were descended from the founders of giant distribution, construction, and transportation corporations (which were known as "old economy" back then). At the time, these corporations were straining under the burden of huge debts, and banks were insisting that they pay back debts due to non-performing loans. I was surprised to hear the true state of affairs of these flamboyant-looking progeny.
The second- and third-generation offspring of long-established large companies where known as the "old rich." Because the old rich were saddled with large debts and their assets were in the form of property and the shares of their own companies, the assets could not be used for investment or consumption. The ones who were truly influential in those days were the IT IPO millionaires in their thirties and forties who had launched businesses, doctors who had built a fortune off cosmetic surgery, and the executives of foreign-owned enterprises - they were called the "new rich."
I was fortunate enough to have a conversation with Genki Kawamura, who is famous for producing the movie "Your Name," when he released "Okunan," a novel that dealt with the theme of the wealthy. He painted a picture of the distrust that the wealthy have of others. I had experienced the same feeling. I felt that the wealthy were isolated and were searching for a network of wealthy companions that they could trust. As a result, I created the private on-line club YUCASEE, which was limited to wealthy people that had over 100 million yen in financial assets.
The story was picked up by the likes of the Nikkei and NHK, garnering a great deal of attention.
Created in 2006, YUCASEE inspected whether someone had 100 million yen of net financial assets. Net financial assets are calculated by subtracting your debts to arrive at your total net worth (mainly cash and securities). I limited YUCASEE to the wealthy with over 100 million of net financial assets based on the idea that although the old rich appeared wealthy, they actually had a great deal of debt, so they could not be the agents of economic revitalization.
A flood of new rich in their thirties, forties, and fifties signed up to the site and in the blink of an eye, it became Japan's largest community for the wealthy. Major corporations such as Ferrari and UBS bank sponsored the site, wishing to advertise their wares to the wealthy. While handling advertising and media work that provided a wide range of information suited to the needs of members, YUCASEE became Japan's largest repository for various types of information related to the wealthy, and it also came to provide consulting services that offered this knowledge to corporations. From the year that it was established, YUKASEE grew into a highly profitable business with superior added value.
Because my job was to ascertain the needs of the wealthy, create services that fulfilled their demands, and provide consulting to large companies that wanted to sell their goods to the wealthy, I undertook to consume from a professional perspective. I bought a Ferrari and owned a Patek Phillipe. I tried the dégustation menu at La Tour d'argent; I stayed at luxury hotels all over the globe, including Hotel Helvetia & Bristol in Firenze, One&Only in the Maldives, Le Meurice in Paris, and the Diaoyutai State Guesthouse in Beijing.
Experiencing that lifestyle once was enough to satisfy my curiosity in the first half of my thirties; in my late thirties, I had no car, my watch was my iPhone, and my hobbies were work and reading. It is not that this is some particular ideology of abandoning possessions for honorable poverty, or that I am a follower of the philosopher Diogenes and his school of cynicism which rejects the ways of the world. Even if I had tried to pursue a Baudrillardist "symbolic exchange," I would not have understood the symbols. For me, luxury goods were like pearls cast before swine; all in all, I realized that to me it would only ever be business research.
When I analyzed the data of the wealthy, I discovered the fact that the wealthier someone is, the more they are interested in overseas funds – particularly hedge funds. Their interest in overseas hedge funds was overwhelmingly greater than their interest in food, clothing, shelter, and related items. I learned that the wealthy like investing more than spending. If you think about it, it is obvious. You will not remain one of the wealthy by saving and spending alone.
At the time, critics would say that the truly wealthy treated asset preservation as most important and had no interest in high yields – the wealthy who pursued returns were not really rich. However, this theory is limited to the old rich in their sixties and seventies; the new rich in their forties and fifties that are still working actively engage in asset management. I realized that the business community did not understand this fact.
Therefore, after changing the trading name of a subsidiary which had been providing investment information to the wealthy from Abraham Investment to Abraham Private Bank, I registered it with the Financial Services Agency as an investment advisory business specializing in providing information related to overseas funds. It opened for business in 2008.
Column 3: Reforming Japan with a New Business Model (2008-)
Responding to the needs of YUCASEE members, the overseas investment advisory business of Abraham Private Bank (est. 2008) grew rapidly thanks to the support of customers – who were mainly the wealthy.
The Global Financial Crisis presented an opportunity. The wealthy of Japan had been relying on major brokerage firms but having sustained losses due to the financial crisis, they held a burning desire to manage their assets via overseas funds, which were generating profits despite a falling reputation, and which could not be obtained through Japanese financial institutions.
On the other hand, the GFC was the catalyst for overseas hedge funds that had traditionally disregarded individual Japanese investors to expand their focus to include not only institutional investors but individual investors as well.
Institutional investors and individual investors have different investment tendencies and those tendencies also differ between Asia and the West. Hedge fund managers attempt to diversify and decentralize their sources of funds. This group were reminded of the importance of individual investors, who unlike institutional investors, are the core constituents of long-term investments, and this drove the movement to also open the door to Japan's individual investors.
YUCASEE – Japan's largest community reserved for the wealthy – directly linked the wealthy of Japan with overseas hedge funds, in all likelihood for the first time in Japanese history.
The moment business opened, we received a flood of inquiries from overseas fund companies that had found out about us through overseas publications such as the Wall Street Journal and Reuters. Provided we had information about valuable overseas funds that could not be obtained in Japan, wealthy Japanese members would come through word of mouth. Based on registrations, the value of assets of our wealthy members exceeded 1 trillion yen. If we could become a private club where Japan's wealthiest elite gathered, we could obtain even more fund information from across the globe. Positive feedback began to circulate. The investment advice balance grew rapidly and we became Japan's largest investment advisory company specializing in overseas funds for individuals.
Our wealthy customers bought into our company saying, "This is just like Nagasaki's Dejima [an artificial island built in 1636 that served as the only trading place between Japan and the outside world]. It has information that truly benefits us investors here in financially isolated Japan." Those of us running the business also threw ourselves into our daily work in the knowledge that we were helping investors.
In the Deloitte Touche Tohmatsu Limited Japan Technology Fast 50 – an award presided over by corporate auditor Tohmatsu that is given to rapidly growing technology ventures – our company recorded a 119% sales growth rate across the previous three years, which placed it 20th in Japan. We received the award two years in a row, ranking 12th in 2011. The number of people joining our company from large brokerage firms also increased and our business operations expanded.
Although our fame had increased within the wealthy sector, the impetus which expanded our recognition among the rest of the population was provided by the weekly Shukan Bunshun magazine. In May of 2012, thanks to the magazine running a feature with the title of "The Path to Assets of 100 million Yen, Starting from 100,000 Yen a Month," there was a huge reaction not from our usual customers of the wealthy who held shares, but from high income earners with high cash flows.
Consequently, we dropped the figure from 100,000 yen to 50,000 yen and targeted people in their thirties and forties, using the sales copy "100 million yen from 50,000 yen a month." In October 2012, we released the "Itsuka wa YUCASEE [YUCASEE, One Day]" service, which was a system to make monthly savings while also making long-term investments with overseas funds.
Japan had an excess of debt and a survey showed that 90% of the population were worried about the future of the pension system. It was said that someone would need 100 million yen of funds for their retirement. The target of 100 million could be achieved by managing 50,000 yen per month at an interest rate of 10% over 30 years. However, there are no commodities that successfully provide the 10% interest rate over the long term in Japan. On the other hand, there are funds overseas with interest rates of over 10%. So, we aimed for that future 100 million yen by making cumulative investments of 50,000 yen a month in portfolios that incorporated blue-chip overseas funds. If a person saved 100 million yen, they could even join the exclusive YUCASEE club. The concept was that people would think, "It would be nice to be able to join YUCASEE one day."
We positioned Itsuka wa YUCASEE as a business which would solve Japan's pension problem, launching an extensive advertising campaign which included TV commercials and full-page advertisements in newspapers. As the business targeted my generation, I put my heart into it. I genuinely felt that I wanted to change Japan with this new business model. Although the service was intended to help a broad range of ordinary people, in actuality, a lot of people from large corporations signed up as they had the means to save 50,000 yen a month.
In order to roll out the model grown in Japan to other countries, we set up a brokerage subsidiary in Hong Kong and prepared for a global expansion.
As the owner of a growth company, I was called to a variety of meetings, invited to Hong Kong and Europe, asked to sponsor a classical concert, and presented with a proposal to buy a soccer team. However, the higher you climb, the harder you fall. A great hardship awaited.
Column 4: Setback and Restart (2013-)
In October 2013, the magazine AERA published the "Failure and Miscalculations of the Gifted President of Abraham/one of MITSUI & CO.'s Elite." The Financial Services Agency had handed down a six-month business suspension order to the rapid-growth venture company Abraham Private Bank.
On October 2, 2013, just as the company had reached a point of renown where it was virtually impossible to find a person in Tokyo in their thirties or forties who had not heard of it, I received a push notification on my smart phone for an opinion piece on "What administrative measures will be taken against Abraham?"
"What? No way!" there must be some kind of mistake, I thought. This was because until that point we had been in the midst of discussion with financial authorities as to whether our work was considered "advice" or " solicitation" under the Financial Instruments and Exchange Act.
Upon hurriedly checking the details of the Nikkei newsflash with the financial authorities, I was told that there was no truth to the story, so I put out a press release via our website stating that there was no truth to the media report.
Three days later, financial authorities imposed a recommendation for a six-month suspension of business against Abraham Private Bank. The widely reported story became "Major investment advice company trading without registration, breaches Financial Instruments and Exchange Act," and was covered on the front page of the Nikkei evening edition, as well as on NHK News and Mezamashi TV among others.
The reason for the punishment was not any kind of financial crime such as insider trading. It was not that we had harmed investors. It was not even an incident of a civil case or a criminal matter. Due to the "Regulations affecting the entire investment advice industry (The Nikkei, Oct. 10, 2013)," our company was one of the fewer than 10 overseas fund advice companies that were hit with orders to suspend business around that time.
However, the news that "the major investment advice company Abraham has been forced to suspend business for breaching the Financial Instruments and Exchange Act" was more than an industry regulation story – it gave the world the impression that we had committed a financial crime.
Although Britain's Financial Times (Oct. 17, 2013) ran a follow-up report stating that we had not lost customer funds or recommended a dubious fund, the impact of the initial reports was too big for us to change our global image.
In terms of the tarnished image, the naivety of our company's communication until that point was a blunder. At the time, we implemented a PDCA cycle that involved conducting A/B testing via Internet advertising using ad technology and used well-known personalities in our TV, magazine, and newspaper advertisements, generating a strong impact on those that saw the ads.
Our "100 million yen from 50,000 yen a month" sales copy was sensational, and the world was skeptical of whether there really were funds providing 10% annual interest. Our understanding of the law at the time was that there were provisions stating that information related to overseas financial products could not be published on a company's website; as we were unable to publish content replying directly to the world's suspicions, we were unwillingly forced into a position of not providing sufficient information.
Reflecting on it now, of the start-up investment companies with flashy advertising, there are many that go on to commit fraud. Unfortunately for us, this was a time when the world was agitated by an actual incident of fraud involving MRI International and overseas funds. At the time, I was unaware of any risk that I could possibly be regarded in the same light as fraudulent funds. My adviser back then – the former executive vice president of MITSUI & CO. – had told me to be very careful about being too conspicuous.
Although analysis of the reaction to our TV commercials showed that they were received well by our targets (those with high incomes and those with high financial literacy), viewer survey results suggested that the general public with no investment experience thought that we were nothing more than a suspicious-looking service.
It was when I was unexpectedly covered in the magazine Friday that I wondered if the impression of us as a start-up that had grown suspiciously fast was strengthening. Although a subsequent vice president of the Bank of Japan would appear in our company's owned media, the suspicion that we had achieved our rapid growth as a result of some kind of collusion or monetary links between the Abe administration of the time and our company had been created, and the direct interview in Friday resulted in the strange occurrence of me being secretly photographed when I was walking across a pedestrian crossing.
The news of our business suspension landed in a world that was already wary due to the negative brand value created through our clumsy advertising. With the world thinking that the government was punishing this suspicious company that had grown so fast through overblown advertising, it was inevitable that trust in us would suffer.
On the same day, the corporate auditor Tohmatsu made the unilateral announcement that it was revoking the award it had given us as a rapidly growing venture company. They presented themselves as people who always encouraged ventures with such statements as, "Take up a challenge without fearing failure!" but distanced themselves from us when a failure actually occurred. Surprisingly, however, they were the only ones to act this way – the majority of other existing business partners did their utmost to cheer on and support Abraham.
The financial authorities handed down many suspensions of business as administrative measures against large financial institutions, including Daiwa Securities, Sumitomo Mitsui Banking Corporation, Rakuten Securities, and Monex. The financial institutions that were hit with suspensions of business would either appropriately improve their business and reopen or collapse. In the case of Abraham Private Bank, the main reason for the punishment was a problem of interpretation regarding operating licenses required under the Financial Instruments and Exchange Act.
The boundaries of our line of business under the law were actually unclear, much like the distinction between a relaxation salon and medical care, or the coins for an arcade game and currency equivalents. Financial business is similar.
The industry is divided into three sectors: banking, securities, and insurance. In contracts where money is received commensurate to the credit risk of the trading partner, artificial lines are drawn – for instance some commodities are treated as insurance, and some as derivatives. If treated as the former, the Insurance Business Act applies; if treated as the latter, they fall under the remit of the Financial Instruments and Exchange Act (former Financial Services Agency lawyer, Masakazu Matsushima, 2016).
Depending on whether our business was considered "advice" or "inducement," the necessary license would require registration as either advice or sales. The opinions of our company and the financial authorities differed on this point. Consequently, we were deemed to be trading without a sales license (registration). If you lack the qualification, naturally you should stop doing business, so we were punished with a suspension of business.
Because the problem was the authority's interpretation regarding an unclear part of the law, at that point, the parties concerned (us, our legal advisors, and major law firms) still had no idea how or what to improve in order to act in accordance with the authority's intent. Consequently, six months later, we still did not know whether we would be able to resume business. Hypothetically, if we were unable to resume, there would never be any new sales, meaning that corporate bankruptcy was also a possibility. If that happened, thousands of investors would be inconvenienced.
The result of the rollout of showy TV commercials and a vigorous expansion of business operations was an order to suspend business. After driving at great speed, we had hit the guard rail, become disoriented from the shock, and still could not really process what had happened. But whether we would sustain major damage or return to our original course was dependent on where I steered us from there. That was a critical moment.
My initial response to the situation would undoubtedly determine the fate of the company. In my first words standing before the staff on the morning after the punishment was handed down, I announced the following to the entire company:
"For the six months during the suspension of business, there will be zero new income. Even so, we will not let go of even one person. Employment will be maintained throughout the entire company."
During this maelstrom, Kazuhiko Toyama (former COO of Industrial Revitalization Corporation, current CEO of Industrial Growth Platform, Inc.), who I had a relationship with after having a conversation in the past, gave me some advice.
"I’ve noticed two patterns in similar situations in the past. The first is that there are people who get themselves into deeper water by seeking help in a dangerous direction. The second is that there are people that have recovered without crossing the final line despite the bitter experience of failure. I expect that you will make it through this hardship."
"That's right," I thought; being open and above board is the best plan. The words of a corporate revitalization professional gave me a great amount of courage. Fortunately, the company had operated without borrowing since it was established. If a company has never borrowed from a financial institution, it will not go bankrupt even if it suspends operations. Without the pressure of a payment deadline, it is possible to respond by working with concentrated effort.
Such an opportunity was seductive.
"This is just between you and me, but I have a friend inside Financial Services Agency; it looks like they plan to destroy Abraham. In other words, there's no way that you'll come back. You should sell the company now. How about two billion yen?"
A person came to buy the company telling me that. The existing investment advice contracts concluded with thousands of wealthy clients were worth tens of billions of yen, and the total amount of stock revenue expected in the future was calculated as over 15 billion yen. Due to the current value, the discounted price was two billion yen, and as the founder of Abraham, I owned 90% of the shares. Under his logic, I should sell the company and move to Singapore or somewhere, living in comfort with 1.9 billion yen.
However, I felt that this was cutting and running. That is not something that is in my nature. If I fall down, I want to get back up. I felt that the meaning of my own life was in the very act of successfully rebuilding the company alongside the staff – my friends. I set my sights on starting my own company at 30; at this point, I was on the verge of 40. To put it in terms of a TV drama, this point would be Part 3: "Setback." The title of the Part 4 would be "Restart."
To overcome the situation and establish a road ahead, after deciding to get advice from a variety of finance industry-related angles, I used introductions through my connections to consult with the former finance minister, government officials in the Ministry of Finance and the Financial Services Agency, and executives of major brokerage firms. When I put together the conversations with people in a variety of positions, it became clear that the company needed to create business operation and compliance stances that were on a different level compared to the series of other overseas fund investment advice companies that had been ordered to suspend business, thereby having the financial authorities recognize in us a corporation and business format essential not only for individual investors, but for Japanese society as well.
I solemnly continued to deal with the administrative measures while at the same time carrying out a variety of improvements, including the new hiring of a senior compliance specialist, inviting a former executive director of a major brokerage firm to be an external executive, and establishing a new subsidiary registered as a sales company (Abraham Wealth Management).
Since one of the reasons given for the suspension was our advertisement wording, people mistakenly believed the suspension of business was due to the fact that the high-interest funds that Abraham had endorsed did not actually exist. We responded to these incorrect reports by putting out subsequent press releases, including one titled "Regarding past reports related to Abraham Private Bank Ltd," and continued to strengthen internal controls, such as establishing an advertising review process, to prevent reoccurrence.
During this period of business improvement, I received a request from Nikkei Business asking if I would appear in a feature called "Defeated generals talk about the battle." Even though I had a mountain of things that I wanted to explain, at that point, I had to show the world via my results (that is, business resumption), rather than words. I devoted myself to quietly establishing a compliance-focused stance and improving business.
The bitterly dark six-month period passed, with all employees returning for the resumption of business in the spring of 2014. Thanks to the staff unifying to stare down the difficulty, over 90% of customers remained with us. The company was invigorated thanks to the major advertising agency listed on the First Section of the Tokyo Stock Exchange, Asatsu-DK, and well-known investors subsequently joining the company as new financiers. The metaphorical purification ceremony was completed when the Financial Services Agency granted the company a sales registration and we engaged a new corporate auditor. What allowed the company to resume business was the support of the several thousands of customers that made up the 90% that remained with us, despite our having caused them a great deal of trouble in a variety of respects.
Column 5: Dawning of the Era of Fintech (2015-)
After Abraham Private Bank successfully resumed operation as an investment advice company, Abraham Wealth Management acquired a sales license as a compliance measure, and we started operating as a multi-faceted financial group.
Since we entered the 2010s, fintech has become a hot topic throughout the world. Although the major US fintech company Lending Club was ordered to suspend business in 2008 by US financial authorities due to legal issues after establishing an unprecedented financial business in the "IT × finance" field, once the legal interpretation solidified and the company obtained a new license, it successfully listed on the stock exchange in 2014 with a market cap of one trillion yen.
In 2013, the US CNBC reported on companies that would have an impact large enough to disrupt their industries in the feature "50 startups that will create the future." 12 of the 50 were fintech-related startups, and four of those were in the field of asset advice services. Investment in fintech ventures increased by over 300% over four years, and the number of cases of investment by the top US venture capitalists in fintech projects increased by over 400% in a five- year period.
In 2006, shortly after establishing my business, I had just procured a total of 500 million yen from the likes of Tokio Marine Nichido and Jafco for "IT × finance," and the term "fintech" did not exist. Although this sum of money was one of the largest procurements achieved at the time, by 2015, there were venture companies appearing in Japan they were procuring four billion yen from venture capital by dangling the keyword "fintech." In 2015, fintech had even captured the attention of the general populace of Japan to the extent where NHK began to run special features on the rise of fintech.
In early 2015, since I had also raised capital through private equity placement with shareholders, I had many opportunities to talk with venture capitalists. While talking with them, Abraham Private Bank was influenced by world trends and began to be called fintech, too. This is because from the start, I had been making proposals to individual investors by using our own information analysis algorithm to select the optimum fund for them from more than 100,000 funds across the globe.
Specifically, we scraped global market and fund data, analyzed it with our company's own algorithm, then selected the optimum funds that were worthy of investment from Japan's wealthy. The algorithm had some unique aspects such as adding a strong weighting to funds that had performed well in the past, and it was possible to develop these aspects into AI. This kind of mechanism would make it possible to provide excellent information to private investors at a lower cost. In a manner of speaking, it would be possible for technology to replace the work performed by traditional research analysts.
AI application and research in the investment industry means algorithmic trading in which management results are improved by analyzing a variety of big data to discover investment targets, such as shares that are likely to increase in value. Although I anticipate that AI would be the alpha source for management companies researching and developing trading algorithms, my own company has no interest in using AI in that manner.
The image of my company is one of a neutral fund rating organization; it is positioned to use big data to carefully select superior funds worthy of long-term investment by the wealthy from a huge volume of fund data. We have seized upon artificial intelligence as a means to improve the accuracy of that investment advice.
Venture capitalists were often discussing whether the name of our service and company should be unified – a question with a view to future global expansion. This was because we had narrowed down the targets of Abraham Private Bank's investment advice at the time to the overseas funds we were specifically targeting, hedge funds. I was opposed to changing the name of the company. This was because I hated the idea that people would think we changed the name due to the incident, even though it was a few years earlier.
That said, "one company, one service, one product," had become a business trend, as exemplified by Google becoming an enterprise under the holding company Alphabet Inc. in August 2015. It was logical for a company to change its name to better fit a particular target segment or business as society matured and needs diversified.
The following year, 2016, was the 11th anniversary of our company and we were facing the new milestone of another decade. I thought that it may be good to change the name for a fresh start and as a juncture in our history. A name befitting a venture company that brought together the previously disconnected entities of individual investors and hedge funds. A name that clearly and succinctly conveyed the value of the service. Therefore, in January 2016, Abraham Private Bank Ltd. became Hedge Fund Direct Co., Ltd.
At the same time, the subsidiary running YUCASEE, Abraham Marketing Ltd., became YUCASEE Wealth Media Co., Ltd. The name of Abraham Wealth Management Co., Ltd. did not change. It is the emotional attachment of a founder trying to retain the name by any means.
I wanted the name of the group holding company which ties up our operating companies such as Hedge Fund Direct and Abraham to encompass the fact that we wanted to walk together with our customers, so I decided on "Ayumi [to walk; to progress] Trust."
It was also so I would not forget the experience of being able to resume business two years ago thanks to the customers.
Since April 2016, there has barely been a day when the word "fintech" has not appeared in the Nikkei. A fintech study group which had about 10 participants only a year ago now has 100. Although the work our company performs has not changed that much from the past, there has been a change in the public's view of Hedge Fund Direct. We are now recognized as a fintech company to the point where we have been covered by the Shukan Diamond, and have appeared in a report for Singaporean investors and in an analysis paper concerning Japanese fintech companies. Against a backdrop of many fintech enterprises which lead with expectations and image and have no actual sales, we have also reached a point where we are frequently evaluated as a sound fintech company with a unique position and which has accumulated over 89.5 billion yen worth of investment advice contracts.
In July 2016, the Financial Services Agency established the Financial System Council to discuss renewing measures etc. for once-clear regulations that now have blurred boundaries due to the rise of fintech.
With an awareness of the issue that technical innovation within fintech is developing rapidly, meaning that fintech progresses at a pace faster than legislation, the Financial Services Agency's Yuichi Ikeda (Director-General of the Planning and Coordination Bureau) stated that "The current legislation system continues to lag behind the times in a number of aspects and we are swiftly working on a solution" (Nikkei, July 28, 2016).