Sandro Steiner of OLZ Wealth Management discusses how external asset management (EAM) firms can create investment performance for their clients, and explains what their returns expectations should be.

Date: Mar 2012

Tags: EAM, Independent, Value proposition, Asset allocation

• An EAM is designing the portfolio, providing ideas and highlighting risks and other potential obstacles – then the EAM then goes to its partner banks to create the right solutions
• While selling returns is attractive, when linking risk to return, most people will go with the lower-risk option
• Psychologically, he explained, most individuals prefer not see any fees on an account statement, but they also pay an architect and want to use a trustworthy one to avoid the impact of making the wrong decisions at the start

When EAMs try to create investment performance for clients, Sandro Steiner said in an interview that it is easiest to liken the situation to building a house. This requires an architect to design and coordinate the project, with different skilled workers constructing different parts of the house.

Using this example, an EAM is designing the portfolio, providing ideas and highlighting risks and other potential obstacles, he explained.

When execution is needed, the EAM then goes to its partner banks for the individual product specialists to create the right solutions, added Steiner, to enable the EAM to choose the best fit for the client from the product shelf.

Returns expectations

In terms of returns, Steiner said it is human nature to be greedy and seek more and more returns without additional risk.

However, the added value of a financial market is zero, he said, because it is a marketplace which should be driven by increasing efficiency. Also, in terms of transparency, Steiner said there should be a single defined market price rather than multiple prices for the same thing.

If clients invest with this in mind, then he said they will not expect more returns from an EAM than from a bank.

At the same time, with the incentive structure meaning the EAM is only paid by the client and has no reason to increase margins, Steiner said the adviser is focused on reducing the client’s risk.

Clients should see this as added value in helping to increase returns, he explained – while selling returns is attractive, when linking risk to return, he added that most people will go with the lower-risk option.

How to make money

In terms of making money, Steiner said there are two different ways to do this in the industry. First, an adviser might buy a bond for 100% and then sell it to an investor for 102%, but no fees exist on the account statement. Secondly, the adviser discloses that they have added a margin and reveals what that is.

Psychologically, he explained, most individuals prefer the first option. However, people also pay an architect and want to use a trustworthy one to avoid the impact of making the wrong decisions at the start.