Singapore and the rise of the external asset manager

Singapore and 

the rise of the external asset manager

a new type of Asian private banker: the external asset manager.

Singapore has become a testing ground for a new type of Asian private banker: the external asset manager. An established model in Europe for some years, these independent boutiques, often launched by relationship managers who have grown up in the bigger private banks, are now gathering pace in Asia.

Take Urs Brutsch. He built a successful career at Credit Suisse Private Banking and subsequently its subsidiary, Clariden Leu, running the business for the region at both. But in June 2009, he left and founded a new business, Hoffman & Partners Wealth Management Singapore, subsequently renamed HP Wealth Management. Today, it has seven staff, rising soon to nine, and offers independent advice to clients on a discretionary or advisory basis.

Why? “The main reason I did it is, I think, the same as for everybody else who has done it,” he says. “It’s a combination of factors. It’s that you want to run your own business; as an entrepreneur you feel a bit limited in a bank, or you build something but it’s not yours really. Things change at the top, and at some point you have probably had enough of that.” Then there’s the daily drudge of a big enterprise. “If you are in a large organisation in a senior position, you spend a lot of time on non-productive things like business appraisals, attending meetings, and not enough time with your clients. When you’re part of a small company like this, you have so much more time for your clients. Hopefully the client sees the difference – that’s why they pay us.”

Brutsch thinks the model is, in Singapore, “six or seven years old at best.” The Association of Independent Asset Managers Singapore (AIAM), founded in March 2011, has 22 active members, and in total there are thought to be 35 to 40 companies following a similar business model in Singapore. Some exist in Hong Kong too, although the more common model there is independent financial advisors, focusing more on the upper end of retail; as is often the case, Singapore is proving a test case for new ideas in private banking. “The number of EAMs [external asset managers] we have in Singapore is going up, not just for Europeans coming in, but Asians wanting to set up their own businesses from the banks.”

Like much else in private banking, this idea started in Europe and is now finding its way here. Chuck Ng, head of external asset managers for Asia Pacific within the private banking division of Credit Suisse, says the model is moving to Asia “in a similar fashion to the transfer of technology in other fields, largely through blueprint copying and adaptation, and idea diffusion.” One sees this in the increasing number of Swiss-originated EAMs that are building satellite operations in Asia. “The idea is to take the Swiss blueprint and first execute a replication strategy in the Asia office. With some of their original home-base clients booked in the Asian office, they then extend services to local Asian clients.” At the same time, home-grown operations in Asia are using European models, driven by client ideas of how they should look. “The Asian wealthy are becoming increasingly sophisticated and their understanding of the EAM concept is the most critical growing industry phenomenon that will propel the EAM segment forward.” Ng expects annual growth rates among independent wealth managers of 15 to 25% per year.

EAMs are never going to be big enough to handle the transactional side of the business – the custody, the execution – so the usual model today is for the boutique to offer advice, and then link with one of the big names for the back-end services. “Clients keep the brand they are comfortable with, the UBS or Pictet, and get independent advice,” says Brutsch.

One consequence of this approach is that it is very hard to do from scratch. “It only works if you have been in the industry a long time,” says Brutsch. “If you are in your 20s or early 30s it won’t work. It’s only for more mature senior bankers.”

He adds: “I’m not aware of anyone who has ventured into this without having been with a private bank before. You need a portfolio of clients, otherwise it is tough to get into.”

On the face of it, this all sounds like bad news for the banks, since the whole model revolves around taking clients who were previously served by those banks, and doing it with staff who were originally RMs in the banks too.

There is some antagonism, but Anthonia Hui, who is both CEO of independent asset manager AL Wealth Partners and president of the AIAM, argues that’s entirely the wrong attitude. “There is a lot of misunderstanding,” she says. “There are some bitter comments from bankers who see us as a threat. But they don’t understand the business model: that we are complementing what they are dong. If anything, they should count us as a blessing.”

How so? Well, banks still get the assets booked on their platform, and they get the custody work and often the brokerage involved. If anything, they just miss out the thorny bit: advice. “From a bank’s point of view, they don’t have to worry about managing our career and compensation as if we were their staff, because we’re external and not employed by the bank. They don’t have to carry our costs or be responsible for our investment advice. But we bring clients to them, book AUM in their platform, and create transactions that help to generate revenue. It couldn’t be better from the banker’s point of view.”

In fact, many banks do see this very clearly, particularly the ones with their roots in Switzerland, where the independent model has been commonplace for decades. “It’s more of a complementary part to our business,” says Reto Marx, regional head of UBS Global Financial Intermediaries for Asia Pacific. “Many people in the first glimpse would perceive them as competition, but that’s not the case.” He thinks the growth in this model in Asia – and worldwide – has its roots in the financial crisis, among other reasons. “Since then, in Europe you have seen relationship managers making themselves independent, maybe due to a crisis of trust from the client side; it was perceived that you probably require a third party to provide additional insight without conflicts of interest. So it’s more about the psyche of the individual, where they feel more comfortable, and for many of them that’s a small family-like environment but with the security of a big bank behind it in custody services.” And if that’s the client attitude, the best way a bank can approach it is to help the independent advisor and at least keep the client assets on the books.

In fact, UBS services about 2,500 financial intermediaries in 25 locations and 14 countries, and approximately 200 in Asia out of Hong Kong and Singapore. That, however, takes a rather broader definition than the external asset manager we’re talking about here: Marx also considers multi-family offices; fund managers who run consolidated funds rather than individual accounts; banks, brokers and insurers (BBI); and semi-institutional clients among his area of coverage. “The traditional asset manager is still a small community, albeit growing,” he says, saying he sees more traction in the fund manager and BBI space in the short term.

Credit Suisse, too, has embraced this approach. Globally, it has more than CHF90 billion in assets under management from EAMs, providing custody, brokerage and lending services through the prism of external managers. Credit Suisse uses an open architecture platform through which external managers can access investment products.

Brutsch argues that from the revenue side, banks may actually make better margins doing it this way. “Some people in some banks see us as competitors, and that is ludicrous,” he says. “On the money they make from clients serviced by independent asset managers, the cost income ratio for the bank is probably better than from their clients. There’s no acquisition cost, we do the marketing, there’s no cost for management or advisory, and they outsource the reputational risk of bad advice.”

And how about for clients? “On a net basis, I think it’s zero sum game,” says Brutsch. “There are usually preferential deals with custodian banks for execution and custody fees; the client pays less, but pays an advisory fee. But we don’t compete on pricing; we’re not saying we’re cheaper than a bank.” Marx adds: “The performance after fees is what counts, so with consolidated charges and based on quality of service, I’d say there are benefits for all parties involved.” And Ng says: “Fee arrangements vary from EAM to EAM. What is important is that clients understand the value they receive from their managers.”

For international banks, though, this does raise a reputational risk. “We very clearly distinguish between who is our client [the intermediary] and to whom we provide what services,” says Marx. A typical approach is that the end-client of the financial intermediary signs an account with UBS, but also signs limited power of attorney giving the intermediary discretionary power over the investments of that account. “UBS focuses on the FIM [financial intermediary] in the first place, so our interaction with the end client is rather limited, with no investment content.” He speaks of a triangular relationship between bank, client and intermediary, with clarity on exactly who does what and is responsible for what. “But some banks in the industry do not make this hard split between who they actually service, and that can harbour future difficulties.”

That can lead to trouble. Ng at Credit Suisse says it is “of paramount importance to manage reputational risk. We work very closely with our EAMs so that there is full understanding of the safeguards needed to ensure this.” Credit Suisse conducts detailed assessments of external managers before working with them, and continues to conduct due diligence afterwards.

EAMs, too, want a very clear separation of responsibility, and have as much to lose in terms of reputation as anyone else. “Let’s be clear on this,” says Brutsch. “The bank still accepts the client; we cannot tell the bank ‘you open an account for this guy’. So in that sense the reputational risk remains with the bank: they make the due diligence checks and they ultimately decide which ones they accept.”

The regulatory position around these businesses is interesting, and a point of some irritation for Hui who is visibly still fuming about a private banker who accused external asset managers of not wanting to abide by bank rules. AL Wealth Partners holds a CMS licence (capital market services), while many private banks’ relationship managers are operating under the Exempt Financial Advisor, also known as Exempted FAA, regime. “We are directly regulated while they operate under the umbrella of the bank,” she says. Clients of banks under this regime have all been sent notices explaining how Exempted FAA works – though whether they’ve read them is another matter – and consequently, Hui says, “most bankers are not held responsible for quality of advice, or accountable to be transparent or responsible, to identify if an investment is suitable for a client. As a client, it is a shocking revelation, and you’d be scared by what they are exempted from.”

She says the CMS licence is wholly different. “Under our licence, we have to abide by MAS rules, identifying clients’ risk profiles and the suitability of investments before presenting appropriate investment advice. How can those bankers accuse people who chose to leave banking to set up independent asset managers as wanting to avoid abiding by the rules? Before one accuses, look at one’s own operating model.”

Hui considers big private banking advice to be frequently conflicted and in appropriate, rarely with the client’s best interests at heart. “There is a lack of walking the talk in reality,” she says. However, not all independents do work under the CMS licence, and many follow the same exempt status which applies to a host of other business from real estate investment trusts to venture capitalists.

Hui is keen to stress that going it alone is not easy. “As humans we tend to over-rate our own abilities,” she says. “We think we have the trust of the client, and that the client will follow us because they believe in us. In reality it is not like that: you really have a consistency of track record.” And there is more to it than just advice. “There are a lot of people saying: I used to be a private banker, I have a client following, I’m going to become independent. But they underestimate the difficulty in marketing the brand – because they’re not marketing Credit Suisse or UBS anymore, they’re marketing an unknown name. They are marketing themselves, because they will be the single point of focus the client will have.”

Still, the allure of independence, of paying advice rather than paying a commission to buy a product, is becoming ever more powerful, so we’re likely to see a lot more of this model in Asia. “Clients are spurring this growth as they demand greater attention to all things related to their wealth management needs and beyond,” says Ng.

As an industry, “we are still in our infancy,” says Hui. “It is too early to talk about traction. But we have seeded an idea to the public – to our clients – that they have a choice. They can free themselves from just dealing with banks for wealth management services.”

Popularity: 1% ?