Eric Christian Pedersen of Nordea Bank looks at how private banks should really be viewing their clients and ensuring that what they provide is suitable for them as individuals.
Date: Apr 2011
While there are individuals who are like that within the overall population, as there are in Europe and the US, he said that many people in Asia care more about not putting their wealth at risk. They are also very focused on the fact that the money they earn in their working life is their main source of income, and that they don’t expect to earn more from investing than they do from their career.
As a result, Pedersen said he thinks there are a lot of clients who look first at what they can afford to lose and then consider what kind of returns to expect – and then try to balance that to reach some sort of equilibrium they are comfortable with
This segment of the market is under-served at the moment in Asia, he explained, given that a lot of the banks view Asian investors as gamblers.
Perpetuating the gambling perception
It is important for institutions to change their business practice to adapt to the market, said Pedersen, rather than following their own ideas on how to manage private clients’ money – which leads to the “gambling” myth being perpetuated.
At the same time, the banks are hiring frontline staff who have a background dealing with clients who do take high risks, so the culture gets created that way.
Instead, he said institutions should stick to how they run their businesses elsewhere in the world, rather than changing it according to what they think the Asian market wants.
Changing the motivations of advisers
To help them provide a client-focused service, institutions should also look at their remuneration structures for their relationship managers (RMs), added Pedersen.
He said there needs to be a good element of fixed salary in addition to bonuses, but with a limit on the amount paid in bonuses.
At the same time, when clients ask RMs about what investment ideas they might have like, the advisers must first be very clear to determine where that fits in to their overall portfolio.
For example, are they investing all of their money? What other similar investments do they have already? And which markets are they currently exposed to? These and other questions are key, said Pedersen, because recommending a fund, currency or equity, for instance, in a vacuum is dangerous.
It is then essential to know how much the client can afford to lose, and therefore how much risk they can take on.
For example, an investment which might go up 30% but also fall 30% is fine if it only accounts for 10% of a client’s portfolio, and the rest is well-diversified and conservative.
Offering a more holistic service
According to Pedersen, the extent to which clients need to be re-educated depends on their experience to begin with.
It is also key to explain to them the realistic combination of risk and return, to then be able to construct an appropriate portfolio.
In general, it is about taking a journey with the client, and talking to them throughout the relationship about their expectations and risks. And even if the client says they want to take on a lot of risk, advisers should hold back a bit to make sure the client really understands what risks they are taking on.