As most private wealth managers race to scale their businesses in Asia, Philip Jehle of Lombard Odier is adamant that maintaining the firm’s 200-year old conservative advisory style will prove successful in a market where he thinks many players will fall short of expectations.
Date: Nov 2010
Tags: Strategy, Differentiation, Value proposition, Hiring, Business model, Sales
As most private wealth managers race to scale their businesses in Asia, Philip Jehle of Lombard Odier is adamant that maintaining the firm’s 200-year old conservative advisory style will prove successful in a market where he thinks many players will fall short of expectations.
Although wealth in the region is growing rapidly, there is a limited number of experienced relationship managers (RMs) to service it properly, explained Jehle, who is managing director for Lombard Odier in Asia.
And with the markets still very uncertain, those banks whose businesses continue to rely on transaction turnover and selling products need to change their strategy, he said. “Revenue will diminish as clients’ willingness to continue to buy products based on return profiles is coming to an end.”
In turn, RMs need to add to their know-how so they can offer more independent investment ideas, and therefore re-align their interests with those of their clients, he added.
So without a shift in mindset and style of wealth advice towards this type of approach, and one where RMs are forced to take responsibility for their recommendations, Jehle, a 20-year veteran of Asia’s private banking industry, said he thinks the industry is destined for a shake-out.
Inevitable conflicts
In his 20 years in the region, the last 10 of which have been at Lombard Odier, Jehle said the industry has witnessed a lot of disappointments.
Not only from clients’ perspectives, but also from the banks’ perspectives. “Given the wall of money in Asia, why they haven’t been able to get a bigger share of it is a common question that organisations ask internally,” he said.
It seems that the lack of experienced RMs and the inability of many firms to offer independent advice are key contributors to the industry’s under-performance and potential downfall.
Jehle explained that private banks which are quoted on the stock exchange inherently have a conflict of interest with their clients, as they have to take into account the interests of other parties such as shareholders and layers of management that are remunerated by stock options. As such, revenue growth is very important at all times and hence it can become a conflict when these private banks manage money on behalf of private clients.
This is not conducive to building long-term relationships with clients, he added.
On the flipside, privately-owned banks like Lombard Odier, of which the management has its own money on the line, has a different level of emotional attachment to every decision that gets taken.
As a result, the firm doesn’t face the same problem as many other market players in terms of having to rebuild trust with existing clients in the wake of the financial crisis in 2008.
“Clients have recognised that what we do actually works in comparison to most of the other offerings available,” Jehle said.
As did the more mature RMs, he added. “RMs with more than 10 years’ experience now have a much better understanding of our value proposition of being independent.” This became clear in mid-2010 when Lombard Odier added five experienced RMs to its Hong Kong team, boosting the total number to eight. Asian funds now represent between US$5 billion to US$7 billion in assets under management out of roughly US$150 billion globally – showing the growth potential for Lombard Odier going forward.
The pressure at many institutions of selling products to achieve revenue targets, irrespective of market conditions, have pushed RMs to rediscover the true private banking concept of independent financial advice, explained Jehle.
Harder to make money
The uncertainty and hesitation of clients following the crisis combined with the tightening and growing burden of regulations means making money is very difficult for many private banks in Asia. There is also the fact of ever-increasing salaries.
“I know that many RMs are still highly paid, I can see how much RMs want to earn when they move firms, I can see that clients are more reluctant to use leverage, and I can see the increasing regulatory pressures,” explained Jehle. “Something has to give.”
This doesn’t bode well for the larger, product-focused institutions, he said. “I think there should be a big question mark next to the quality and, importantly, the profitability of many institutions.”
This means banks looking to meet their ambitious hiring and growth targets will find it very difficult.
While he said he is gradually hearing more talk about independent advice as banks realise the importance of offering clients this in today’s environment, this is more talk than action.
“Fundamentally, I don’t think the banks can deliver on this, because of the model most banks still have,” explained Jehle. “The product team is continuing to produce products, the portfolio or investment counsellors continue to join RMs in meetings to facilitate the sale, and RMs continue to try to close the deal. But nobody has an overview or is responsible, which is vital in managing a wealth portfolio.”
Given that 80% of performance is about asset allocation, this needs to be a key part of wealth advice.
It is also difficult to make the change as there is a limited number of RMs with the necessary experience to take on the required responsibility and provide advice in the way it should be delivered. Or the organisation doesn’t want to give RMs the responsibility because of a pre-defined structure.
Ultimately, wealthy Asian individuals don’t want to lose the money they have worked hard to create, and it is an education process, said Jehle. “We are not adjusting too far to the perceived Asian investment mentality of trading and risk-taking, because we believe wealth management is about preserving capital for the long term.”
Tradition breeds experience
Given that Lombard Odier was founded in 1796 in Geneva, Switzerland, it can reasonably be regarded as one of the pioneers of private banking. “The firm has managed private wealth for seven generations,” said Jehle.
Plus, he added, the firm has never lost money, instead often gaining market share during the 40 financial crises it has gone through in the past 210 years or so.
Because of this legacy, plus its private ownership structure, the firm has a lot of old wealth which values a conservative approach to investing.
“When clients invest with us, they are effectively co-investing with the firm, because the partners will put their own money into what they recommend,” explained Jehle. “This therefore gives clients more comfort that our strategy will perform on an ongoing basis rather than for one or two years.”
At the same time, the partners are quite involved with client advice, regularly talking to and advising clients on a one-to-one basis. “This puts top management in touch with what is going on with our clients.”
While this is the bank’s model in Asia, too, it has been a challenge to implement, given that most people prefer to talk about return rather than risk.
It also means that more mature and conservative models like that at Lombard Odier require experienced RMs, as they are comparatively more difficult to sell in Asia, especially during more bullish market conditions.
Less is more
A key reason why the firm sees a lot of potential in Hong Kong for its traditional model is because local clients have experienced various investment cycles and other styles of private banking, so have matured in their approach. “Only then are they likely to want to allocate some of their wealth to an institution like Lombard Odier,” he said.
“The pool of more mature money has grown in general,” he added, “and people pay for our advice, rather than commission for transactions – which is a concept that people can only really understand when they have experienced different wealth management approaches.”
“It takes a lot of maturity for an RM to advise clients against following the herd,” Jehle said. “The classic example of this was with accumulators, which is a product we never sold, despite some clients wanting them and not being happy that we wouldn’t sell them.”
As a result, the firm is not yet trying to expand into China in a significant way. “While it might be exciting to talk about a ‘China strategy’, we would prefer to do so when the market is more mature,” said Jehle.
At the same time, he acknowledged the importance of being able, over time, to offer clients RMB products and investment ideas, both for local and European investors who want this exposure.
A Hong Kong booking centre is also inevitable, and Jehle would expect this to happen in the next two years.
But these initiatives are based on a philosophy which is clearly differentiated from the indiscriminate selling of products so common in the industry in Asia, and the rapid growth aspirations of many firms. “We believe that less is more,” said Jehle.
