Pius Zgraggen of OLZ & Partners explains some of the main differences from a client’s perspective between an external asset management (EAM) company and a bank.

Date: Mar 2012

Tags: EAM, Independent, Value proposition, Expectations

• When clients are weighing up an EAM and a private bank, a good starting point is understanding how the adviser gets paid
• Within financial services, where clients don’t know all the different pros and cons of the industry, nor all the various pitfalls to avoid, they need someone who is independent
• EAMs also help clients to avoid costly errors they might potentially make with a bank by not allowing the client to over-estimate their knowledge without appropriate checks and balances
• With an EAM, the client can feel more and more confident over time to reveal everything needed for the adviser to make the right calls

When clients are weighing up an EAM and a private bank, Pius Zgraggen said in an interview that a good starting point is understanding how the adviser gets paid.

This enables the client to determine how they will act and in whose interests they are most likely to be working.

In practice, if an EAM is only paid by a client, Zgraggen said they will be sitting on the same side of the table because they have no conflicting interests. But if the EAM’s source of income comes partly from the bank, then there is more chance of a misalignment of interests.

Different types of advice

When thinking about the different advice clients get from an EAM compared with what they get from the bank, Zgraggen used the analogy of a cook.

For example, if a client wants to have a meal, they will tend not to cook it themselves because they have limited expertise, but instead will seek the know-how of a chef to choose, prepare and cook the ingredients, in the right combination, and together with the client, to create a suitably varied menu.

Within financial services, where clients don’t know all the different pros and cons of the industry, nor all the various pitfalls to avoid, Zgraggen said they need someone who is independent and has the expertise to advise them properly.

Because a cook is only paid by the client, he explained that there is no incentive to buy over-priced ingredients. Instead, they try to get the best value and the healthiest option for the client.

Avoiding costly errors

EAMs also help clients to avoid costly errors they might potentially make with a bank by not allowing the client to over-estimate their knowledge without appropriate checks and balances, said Zgraggen.

For example, many clients get attracted by the marketing gimmicks and message which lead them towards making choices driven by greed, he said. Yet these high returns often come with high risks and high costs. It is like a cook using the wrong ingredients and poisoning the meal.

A broader product range

A further disadvantage for a client of a bank, said Zgraggen, relates to the more limited product range available as a result of having individual relationships. This happens because certain institutions are often specialists in particular areas.

On the flipside, an EAM can choose from the menus of a wide variety of players.

Ensuring continuity

According to Zgraggen, continuity or consistency should be another important factor in a client’s decision-making process in terms of which type of adviser to work with.

For example, he said, a client who has three relationship managers over a period of five to 10 years has to re-tell their life story several times. And to prevent everybody knowing their full background and situation, a client won’t reveal all the information.

However, with an EAM, the client can feel more and more confident over time to reveal everything needed for the adviser to make the right calls.