Urs Brutsch of Hoffmann & Partners Wealth Management reviews the evolution of Asia’s private banking industry, and explains the value of independent asset managers within a new financial landscape.
Date: Feb 2010
Tags: Business model, Conflicts of interest, Trust, Open architecture, Fees
The Asian private banking industry has expanded rapidly since starting in effect in the mid-1980s.
When Urs Brutsch moved to Singapore in 1986 with Credit Suisse, for example, he was one of only three people in the private banking division. And there were only a handful of competitors, he said in an interview.
At that time, Brutsch said Asian clients were looking for a Swiss-style banking service. Instead of focusing on investments, clients either wanted a plain deposit account or a discretionary portfolio – and they wanted their private banker to visit them once or twice a year.
As the private banks have expanded in Asia, they have introduced into client relationships product specialists across all asset classes, as well as trust and estate planning bankers.
The objective has been to institutionalise client relationships, explained Brutsch, and in turn marginalise the relationship manager (RM) to an extent. This is a difficult balancing act, he said, because despite a client’s need for a strong custodian and an institution with wide product and platform access, many clients view private banking as a personal, relationship-driven business.
Effects of the financial crisis
Following the financial crisis, Brutsch said there has been a swing back towards the traditional private banking model.
Rather than continue with the approach seen in the lead up to 2007, where many products which should never have appeared in client portfolios become very popular, money management is increasingly based on the traditional asset classes of equities, fixed income and to an extent alternative investments.
Client expectations have also changed as a result of the crisis. They are now more concerned about capital preservation rather than aggressively growing their portfolios, said Brutsch.
Different business models
The broker-dealer approach to private banking is a common model in Asia. However, while these institutions are managing wealth, Brutsch said this should not be confused with the traditional approach to private banking.
Banks have a disadvantage in this area, he explained, because they generally have their own products. The only honest form of open architecture is when institutions have no products of their own, said Brutsch. They are then forced to search for the best products to fulfill a client’s asset allocation.
Another model is the one seen at the more traditional private banks, which follow the Swiss style. A drawback in Asia, however, is that some of these banks have been less successful in the region over the past 10 years as they have not grown as quickly as those institutions which have embraced the transactional approach, explained Brutsch.
Following the crisis, the private banking market is also seeing the growth of boutiques, or independent asset managers – a model which Brutsch said he expects to gather momentum over the coming years.
Highlighting the potential for the growth of boutiques, Brutsch said that Switzerland has 3,000 such firms, whereas there are only about 25 currently in Singapore. And up to 30% of the assets under management of some Swiss banks comes from independent asset managers; in Singapore this figure is less than 1% at the moment.
The value of independent asset managers
According to Brutsch, the independent asset management model should be the end-game for any successful RM.
Increasingly, he explained, with banks exposing their staff to so many layers of management, it is difficult for advisers to get answers or make decisions quickly for clients – which is key to providing a good private banking offering.
The flexibility that experienced RMs can get from independently choosing which banks and products to work with is a big advantage, said Brutsch.
Clients also realise that the RM has more time to spend with them and understand their needs – which should result in RMs bringing a better package to the client in terms of service quality and tailored solution.
A double layer of fees?
While the independent model means there are two parties asking for a fee, Brutsch said his clients pay no more overall than with they would with their previous account.
He said he gets a part of the trading commission back from custodian banks, and passes this onto the client.
Comfort and safeguards
According to Brutsch, reassuring a client about the structure and safety of having a relationship with a boutique compared with a large institution comes down to a question of relationships, and whether a client knows and trusts the asset manager.
Client comfort will likely come from a combination of the client knowing and trusting the individual adviser, and being convinced about the business model, he explained.
