At a roundtable discussion in Singapore in mid-December, co-hosted by Hubbis and J.P Morgan, many of the leading local EAM practitioners, including key representatives of the recently-launched Association of Independent Asset Managers, discussed and debated the various opportunities and challenges in this space.
Date: Jan 13, 2012
Tags: EAM, Singapore, Fees, Value proposition, Strategy, Business model, Differentiation
The growing number of external asset management (EAM) companies setting up in Singapore and Hong Kong signals a new phase for Asia’s growing wealth management market. And it is a promising sign for high net worth individuals.
At a roundtable discussion in Singapore in mid-December, co-hosted by Hubbis and J.P Morgan, many of the leading local EAM practitioners, including key representatives of the recently-launched Association of Independent Asset Managers (AIAM), discussed and debated the various opportunities and challenges in this space.
This open and frank dialogue focused on what it will take to ensure continued and sustainable growth and development for EAM industry in Asia – including overcoming misconceptions, the need for constant education, tackling fee-related challenges, building relationships with custodian banks, and learning from the Swiss experience.
Participants
Anthonia Hui
Chief Executive Officer
AL Wealth Partners
Leonardo Drago
Chief Investment Officer
AL Wealth Partners
Urs Brutsch
Managing Partner & Founder
HP Wealth Management
Wilfried Kofmehl
Managing Partner
Lumen Capital Investors
Sandro Steiner
Partner and Managing Director
OLZ Wealth Management
Marco Bardelli
Chief Executive Officer & Managing Director
BDG Singapore
Beat Stamm
Chief Executive Officer
Marcuard Asia
Philipp Piaz
Partner
Finaport
Hans Goetti
Chief Investment Officer
Finaport
Christophe Audergon
Managing Director
CrossInvest
Mandeep Nalwa
Founder, Chief Executive Officer
Taurus Wealth Advisors
Thierry Beck
Chief Executive Officer
SingAlliance
Lemuel Lee
Executive Director, Customized Solutions, Derivatives Marketing, Asia Ex-Japan
J.P Morgan
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Key features of the EAM industry and business model in Asia
The driving force behind the growing interest among Asian clients in the EAM model has been clients increasingly realising – as a result of the financial crisis – that the banks generally act like product platforms.
Clients now want an honest exchange of information and knowledge with their adviser in terms of how to manage their money, said practitioners at the roundtable.
However, the fact that the EAM concept is still relatively new in Asia leads to misconceptions of EAM firms versus IFAs, and in terms of some bankers thinking that EAM firms are not independent. Plus, there is a perception that EAM firms can avoid some of the regulatory requirements that the banks in the wealth management industry face.
As a result, the early movers in this space have formed the AIAM in Singapore to provide a platform for EAMs to network and unite, to help the public better understand the value proposition.
A key part of the AIAM’s mandate is to educate the public and be seen as a single voice to communicate with the regulators.
Part of this is clarifying that the risk profile of EAM firms is very different from those of fund management companies that have managed accounts.
This is achieved by client portfolios being held in their own name and by clients having direct contractual relationships with the custodian bank of their choice, explained practitioners, and then creating a mandate, either on a discretionary or advisory basis, to manage that money with a limited power of attorney over the account with the respective custodian bank.
Some custodian banks may offer revenue-sharing agreements with EAMs. Some EAMs give these retrocessions back to the clients, some may choose to keep them (but with their clients being aware of this), and some refrain from taking any retrocessions.
This model gives clients the best of both worlds, said practitioners. They get the infrastructure and market capitalisation of the banks with which they have a direct contractual relationship, yet they can engage the EAM as an external adviser through the limited power of attorney to help them structure the portfolio management of their accounts with the banks.
They can therefore segregate the function of advice from the custodianship and execution platform, explained practitioners, and in turn avoid potential conflicts of interest, such as in product selection. That has often existed in banks as they act as principals (originators of products and advice) as well as agents (execution and custodian), which motivates some bankers to keep selling products to increase turnover, yet sometimes to the detriment of their clients’ monies.
In the context of clients using independent services to get fair and honest advice which is relevant to their actual financial situation and aspirations, they want to hear, for example, when it might be necessary to close an account or be careful if a bank’s credit risk has risen or its pricing has gone up, said EAM firms, in addition to the type of investments that are appropriate for them.
The professionalism of the EAM industry is paramount, urged practitioners, as this is the core foundation of its survival.
And if it were to encounter similar issues to those experienced in private banking arena, EAM leaders in Asia said the industry would then compete directly with the big banks for business, instead of complementing them with independent advice to mutual clients.
Where next for the EAM industry in Asia
Although the EAM concept is at an early stage of development in Asia, with around 1% to 2% of total assets under management (AUM), there is huge potential for growth.
In particular, the macro-economic environment plays into the hands of the EAM firms, said practitioners, as bankers and clients are getting much more receptive to the model.
This is especially the case for bankers who want to step out of their existing roles and look to a career outside of the private banks to stop the continued frequent job changes from one bank to another.
Yet while the EAM industry in Switzerland accounts for around 30% of private banking AUM, in Asia this will take time to develop to become as mainstream and successful, predicted practitioners.
Plus, Switzerland is probably 20 to 30 years ahead of Asia in the private banking and wealth management industry generally. By contrast, the EAM business in Asia is only around three to four years old.
But part of the opportunity in Asia exists because wealthy people are very brand conscious, and with some of the more established bank brands having suffered badly during the financial crisis, the EAM companies can try to position themselves as the next wave by building up their credibility, they said.
The fact that Asian clients learn quickly is an advantage. They recognise value when they see it and they have been willing to pay for it, added practitioners.
A lot more education needs to be done, however, to ensure growth of the EAM industry in Asia.
In addition to explaining the model and its benefits to clients, education for bankers is important, said practitioners, as EAM firms often need to spend a lot of time explaining to them during the hiring phase about the business model and value proposition.
Without this education, it will be difficult for the EAM industry to grow in Asia, warned key industry figures.
Fee challenges
While EAM protagonists hope to see clients increasingly understanding that they need to pay a fee for service, a lot of the required education also needs to focus on this aspect of the model.
Some of the more pessimistic viewpoints suggested that it will be difficult to get Asian clients to pay for advice for another 10 to 15 years.
They said that until wealth passes to the second and third generation, the majority of the first generation will continue to believe that there is not much benefit to hiring external advisers. In addition, there is no benchmark for paying fees in Asian wealth management.
But as clients in Asia get more experience with their wealth, they will start to appreciate the value of experienced and truly independent advice.
Other practitioners said that the time they have already spent in explaining to their clients the value of their advice and why they should pay a fee – and the fact that the value they get is worth more than the fees they pay – means that their clients are already paying fees. This applies not only to European clients, but also the parts of their client base that are from Asia, they said.
This also has the advantage of making sure that any referral clients already know that they have to pay for the advice.
The danger for the EAM industry if it starts to negotiate with clients on fees, said practitioners, or to not charge fees at all in order to win initial business from prospects, is that firms risk being confused with banks – which on paper don’t charge clients but instead build the fees into the products.
From a practical perspective, if firms cut their fees liberally and only charge a performance fee, then this doesn’t cover the running costs of the company and the EAM firm won’t be able to afford to exist for long, said some practitioners.
Plus, added others, if an EAM firm is only paid through performance fees, then it might take excessive risks on behalf of the client, because the firm wants to optimise returns. It is therefore likely to be best in the context of the EAM model to charge a flat-fee independent from the risk profile.
This is particularly important in certain years, for example 2008, said practitioners, where it might not be possible to create positive performance, regardless of how hard firms try.
Tied to this is the concept of professionalism, which would help the industry to be able to more distinctly attach a fee to the service being provided.
Given that many clients now view a lot of the banks as order-takers, they are likely to be willing to pay fees if they see EAM firms as strategic advisers, said practitioners.
This might include, for example, helping them to organise their private wealth, company wealth and succession planning, and supporting and guiding them with these decisions.
Ultimately, many EAM firms themselves said they think that they will continue to be a niche part of the industry, serving the slightly more sophisticated clients who are willing to pay for service and take a longer term view to their portfolio by practising an asset-allocation approach.
Further, the EAM model doesn’t suit all types of clients, with transactional-oriented individuals likely to be less willing to pay fees and more likely to find the banks/brokers more appropriate to deal with them.
At the same time, some practitioners said they think fees are the last thing clients should be focused on – and that they shouldn’t come to the firm because they can get a cheaper service, but instead because of its pedigree and the personal relationships with them or their friends.
In short, they said, clients don’t buy into a brand – they buy into the individual and the trust they have in that person.
As a very multi-racial market, Asia’s different cultures dictate certain thinking in different segments of clients.
So it is up to the AIAM, said some of its representatives, given its vested interest, to educate and cultivate prospects about how and why EAM firms can justify paying fees.
Further, when it comes to the next generation, practitioners said these clients want to find advisers who care. In addition to their financial wealth, they are also looking for spiritual wealth to fulfill the rest of their life goals, especially when managing their parents’ money.
As advisers, therefore, EAM firms said they have the ability and opportunity to communicate with the next generation about where the legacy came from and how they can uphold and continue this.
What EAM firms look for from custodian banks
When assessing which private banks to develop relationships with, EAM practitioners agreed that some of the most important criteria include: pricing, service, IT infrastructure, research, cost, timeliness in terms of reporting and execution.
A challenge practitioners said they find in building these relationships, however, comes from the fact that they think a lot of banks need to be more realistic in terms of their fees.
Even though an EAM firm might be able to bring US$100 million to a bank over a 12-month period, for example, practitioners said they have seen cases where a client which has US$5 million with the bank has a lower fee structure.
Some practitioners said they feel that the EAM desks at banks see them as revenue and AUM generators, especially when it is more difficult for the banks to generate such assets from their own existing clients.
As a result, EAM firms said they must take advantage of this position to negotiate the best possible packages for their respective clients.
EAM connectivity between Switzerland and Asia
The development of more connectivity between in the EAM space Switzerland and Asia has already begun, with many of the firms already in Asia having links European houses.
More of the purely Asian EAM companies will emerge, said practitioners, although the model is less well-known among local clients.
It is also important that Asia learns from some of the mistakes made in Switzerland’s EAM industry, added industry leaders.
This has already started to happen. For example, whereas in Switzerland there are some very small firms which look after millions of dollars for clients, yet have a very manual and out-of-date approach to their business, the regulator in Singapore is focused on raising the threshold and standard for setting up such firms, and generally on making it a more professional industry.
With such a volatile and uncertain market environment, it is difficult to think five to 10 years ahead. But the focus needs to be on viability and sustainability, said practitioners, so market players need to decide on their business plan, which client segment and type they want to service, what market niche they want to focus on, and how they will conduct their business – in terms of cost controls, systems, infrastructure and relationships.
While there are a lot of other things for the local EAM industry to learn from the European model and managed accounts in North America, practitioners said that Asia’s relatively simple tax systems and transparent rules offer great advantages over what is on offer in the Western world – to provide a good foundation for EAM firms to flourish.
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