Peter Lee of Veco Invest discusses the opportunities and challenges for external asset managers (EAMs) in Asia, and looks at the misconceptions to overcome.

Date: Apr 2012

Tags: EAM, Independent, Value proposition

• With a limited market penetration by EAMs in Asia to date, and given that overall AUM is growing, huge opportunities exist for the industry
• EAMs are commonly confused with independent financial advisers, and it will take time to educate individual investors about what an EAM is and what it does
• Challenges to EAMs growing their businesses include the need to educate clients about the industry, the limited number of experienced bankers who can join EAMs, and the combination in Asia of volatility and demanding clients
• Private bankers need to be able to understand that instead of generating revenue from selling products, they can generate revenue from managing assets

Compared with the EAM industry in Switzerland, where estimates are that independent firms manage about 15% to 20% of overall assets under management (AUM), the figure in Asia is roughly 3% to 5%, said Peter Lee in an interview.

With this limited market penetration in the region, and especially given that overall AUM is growing, he said there are huge opportunities for EAMs in Asia.

This is reinforced by the fact that clients are looking for alternatives, and more and more private banks themselves are looking for independent advice in terms of people outside of the institutions who can provide them with relevant services.

Misconceptions about the EAM model

According to Lee, EAMs are commonly confused with independent financial advisers (IFAs). However, the business models are quite different.

For example, EAMs focus on managing both investable and non-investable assets, while IFAs tend to be more focused on providing ad-hoc financial planning and product distribution, he explained.

There is also some confusion about EAMs, he added, because they sometimes play a role as a multi-family office.

Lee said he expects it will take time to educate individual investors about what an EAM is and what it does.

Challenges to business growth

Among the challenges to EAMs growing their businesses, Lee highlighted the need to educate clients about the industry, such as its costs and benefits, and its value-add.

In addition, there is a limited number of experienced private bankers who can join EAMs, leading to human resources constraints.

Further, a lot of private banks – especially local players – have not yet dealt with EAMs in Asia.

Regulation is another challenge, said Lee, which adds costs. On the flipside, he added, it can create higher barriers to entry.

A final challenge relates to the combination in Asia of volatility along with demanding clients, given that Asian markets have traditionally delivered high returns, in turn fuelling investors’ expectations, he explained. Yet, he added, it isn’t easy to produce high returns in a long term, sustainable way in volatile conditions.

Developing partnerships with banks

According to Lee, with the private banking industry in Asia being relatively new, a lot of bankers have been trained in the process of selling certain products to generate revenue.

This is different to the approach of an EAM, he explained, which operates under a true open architecture to provide best-in-class solutions.

As a result, Lee said that private bankers need to be able to understand that instead of generating revenue from selling products, they can generate revenue from managing assets. Gradually, more and more banks and bankers are becoming aware of the EAM industry.