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Asia’s independent wealth managers – redefining the value proposition

Damian Hitchen

Swissquote Bank

Hubbis and Swissquote co-hosted a fascinating roundtable discussion on the evolution of the independent wealth management model. How can smaller firms compete with the private banks? Who are the new competitors? How can they build sustainable business models? What are the drivers for growth? Can technology empower or threaten? And what are their key priorities for the years ahead?

The roundtable members comprised 15 independent asset managers, family offices and a sprinkling of technology providers. 

The discussion opened with a brief introduction from Damian Hitchen, CEO, Middle East and Asia, Swissquote Bank, who talked about the firm’s market-leading digital, global-trading and custody platforms for independent asset managers and how it’s expanding its client base in Asia.

 

Platforms for EAM B2B partners

“Swissquote provides more than 500 B2B partners globally with full access to our worldwide multi-asset class trading platform that houses some three million investment products,” he revealed. 

“We are committed to our role as professional partners to upscale the capabilities of the independent asset managers and advisory community. As we are also an execution-only platform, there is no conflict between our B2B partners and us because we do not provide clients with advice, that is the role of our partners.”

He added that Swissquote operates globally and across multi-asset classes and does not demand some of the high minimum fees or minimum asset-balances other global custodians do. 

In jurisdictions in which Swissquote is comfortable, which includes Hong Kong and Singapore in Asia, for appropriately licensed firms, Swissquote’s contracting partner is the regulated firm, which can open as many segregated sub-accounts as they require for their end-clients. 

This means Swissquote does not need the connection to the end clients which is used in the traditional EAM model, and makes onboarding significantly easier and cheaper for all. “We are therefore well positioned as an enabler to the independent wealth market offering both the traditional EAM model which is the default in Asia, and the new ‘full relationship’ model as above.”

Hitchen thanked everyone for attending the discussion and explained that the mission was to learn more about the way the independent wealth sector is positioning itself in Asia and the challenges and opportunities they face.

“You are some of the leading stakeholders in the industry over here; we will all benefit from your insights and advice, both constructive and cautionary.”

It is a fair generalisation that almost all independent wealth management firms and family offices were created by experts that built their professional experience and core client base in well known private banks or other leading financial institutions. 

There are exceptions, of course, but the general rule allowed for the Hubbis/Swissquote roundtable participants to offer thoughtful insights into the core difference between the independent models and the private banks.

 

Are big brand banks winning, or churning and later burning?

“We see the great frustration with the banks amongst the HNW and ultra-HNW sector,” observed one expert. “Many clients, especially in the next generation beyond the patriarchs and wealth founders, feel like they are being churned, feel no alignment of interests, and worry that they are simply being sold product after product.”

“Many actual or prospective clients we talk to worry that the relationship with the bank has been lost,” he added. 

“Moreover, they worry about being charged too much by the banks. We, on the other hand, do not sell products to make fees, we get compensated at the end of the year when we help them attain their goals. All this plays into our hands as a family office.”

However, this does not mean the demise of the private bank model, various stakeholders at the table opined. “We must be careful not to extrapolate too far. Let’s not lose sight of the value of the global banking brands; our clients still like to be associated with them and, in particular, usually still like to have the security of their custodial services.”

Another EAM leader agreed, but also noted that there is an interesting dichotomy between the older high worth net individuals who still like the logo of a big global custodian bank, versus the younger new wealth generation who he said care less about brand and more about delivery and interface.

“That HNWIs like to bank with the big brand names or use them for custodial services is not necessarily going away, but there is competition from other big brand names,” he commented.

 

Watch out… competitors in every direction

 “For example, it seems like everyone now sees the Amazons and Googles and Alibabas of this new world as a big and trustworthy. That was not the case 10, or even five years ago, when their brands were almost unknown, so if these companies enter the arena, the competitive landscape will potentially change significantly.”

Another panellist expounded on this concept. “The private banks are not taking the independent asset managers that seriously, which is fair enough because of simply the size difference,” she said.

“But similarly, they are also not paying attention to what is happening under their nose, namely the proliferation of all kinds of tech firms, fintechs, and non-financial firms that now either provide some insurance brokerage services,” she added. 

“Or they provide some trading capabilities, and then they might move on to managed accounts.  Before you know it, you have the full financial picture, and they call it wealth management and are competing with the private banks full on.”

 

Are the banks self-limiting?

Another expert said that private banks are their own enemies by implementing compliance rules which are even more strict than the regulator ever intended. 

“Very simply,” he said, “that means the advisory part of the service is disappearing, but the true USP of a bank historically is not in being the platform or providing custodian services but in providing advisory for wealth protections as well as wealth growth.”

One of the participants added that there are core areas of the private banking model that are under threat from the family office. 

“We would argue,” he said, “that private banks cannot provide a family office service, even though they say they have their family office division. Although it might seem at the outset like they are advising if one reads the fine print they are not in advice at all.”

Private banks are increasingly limited in what they can do, partly from fear of regulatory or legal reprisals if things go wrong, and partly and progressively by their self-limiting internal restrictions, whereby the banks’ leaders and the compliance teams both err ever more on the side of caution.

 

A bull market can mask many fundamental weaknesses

For the moment, that is not a major worry for the banks, which have been buoyed by the resurgent global equity markets and the continued fixed income bonanza. “At the moment,” said one panellist, “the banks are all making money again because they are back to the old days selling all kinds of structured notes, all kinds of products and all kinds of leverage attached to propel client returns even further.”

But he noted that a closer look at the private bank numbers right now shows they are worse in terms of relative cost to income ratios than they were before the financial crisis. “So,” he extrapolated, “when there is the inevitable downturn in the mainstream investment markets, that is when the troubles could start, and inevitably clients that have been sold many of the products and leverage during this bull run will again start squealing to the regulator, and that will have further consequences.”

 

HNW clients – encouraged to excessive leverage?

Another expert agreed and added that banks in Europe and US are already rather smarter and more forward-thinking than those operating in Asia. “I think too many people out here in Asia are still enjoying the old style of banking and just hoping that the party will continue for a while.”

This inevitably led to some discussion about whether the HNW clients in Asia are over-leveraged, especially after the ‘encouragement’ to leverage both equities and fixed income coming from the banks over the recent years or near straight-line market upticks. 

For example, one big brand name global income fund is often nine times leveraged, according to local wealth management folklore in Asia. 

And very often, net new money into the banks is based on those banks providing loans in the first place, to have that money. 

“It is all somewhat smoke and mirrors, we believe,” said one IAM leader, “and as a result, it seems to be highly unsustainable.”

What then is the worst possible scenario? “The risk of a major market correction – let’s say 20% to 30% down – is that everything is correlated,” said one expert. 

“It does not matter if it is equity, property or high yield bonds. And the leverage will potentially come back to haunt both the clients and the lenders. Not a nice scenario.”

 

The draw of the IAMs vs the cosiness of the institution

The private banks are nevertheless warm and cosy places for successful relationship managers, and therefore despite many shortcomings in the near and further term future, the independent wealth sector continues to struggle to attract the best talent.

“In an established private bank,” observed one participant, “the RMs get the employment package, they get holidays, they get their health insurance, they get all of those things. I guess it is a bit of a risk to take the step outside of that employment, and so well established RMs in the bank have little intention of leaving because it is too much of a risk for them to leave that corporate environment.”

He added: “We all know, sitting around this table, that if you do leave the bank, then you have much more freedom to act for your client in the best way. But we also know that there are still many clients, especially the older generation, who like the branded private bank and are difficult themselves to attract from the bank.”

The panellists seemed to concur that those who want a good salary and to finish at a sensible time and forget about work are best off in a bank. “For bankers to move independently, it is a serious move and not easily taken,” said one expert. “So, it does make it difficult for independent firms to grow as rapidly as we would like.”

 

Growth for growth’s sake, or to build a legacy?

The concept of growth caused considerable debate at the discussion. Some attendees explained how they prefer very steady expansion within realistic limits of management expertise, time, money and personnel and recruitment resources. 

Others preferred a more dramatic growth path to institutionalise and fully corporate their businesses, thereby creating long-term value beyond the founder-principals. “Some of the smaller IAMs do not chase growth,” said one expert. 

“They might, for example, prefer to stick with a small number of wealthy clients, they are quite happy and have a very controlled cost and controlled lives. Others want to grow, but to get to the economies of scale to make it worthwhile is often a long road.”

He expanded his assessment by likening the former category to practice, for example, a doctor’s or a lawyer’s practice. 

“But to truly create a business one needs to move beyond reliance on a few people, usually the founders, and grow the people so that the business can itself grow and assume its own life and momentum.”

Another IAM leader explained that when they started several years ago, they rapidly grew to a ‘decent’ size but then hit a growth ceiling. “We realised that most of our clients were clients of us, the founder-partners, but we wanted to build it into a business. That is why we are setting up in Japan, why we are buying a US business, and at the same time we are intent on becoming more digital.”

Extending this thought, he also added that founder- partners of the IAMs need to accept that they should become to a certain extent arms’ length from the operation because in that way they can create scalability in the business. 

“Are there risks for that? Of course. A lot of execution risks, or a lot of capital risks. Yes, you have less risk being a practice, but you are more dependent on some key people, and there is less value implicit in the business.”

A representative from a family office explained the more bullish growth model to the attendees. 

“About five years ago I started a family office,” he said. “Very closed door, very small and just the two of us, and then a few traders and others to become six. After a while, we realised that we could try to keep everything very lean, but that if we are going to keep the business afloat or make more money, we must hit a certain size and achieve a certain AUM. Being owners and RMs and many other roles are riskier than taking the growth model.”

 

Rapid growth means scalability

He stated that his aim now is to hit USD10 billion AUM within three years. “When we hit that sort of number we can spend lavishly on PR and advertising, we can even entertain clients as well if not better than the private banks ever used to.”

Another expert explained that their first attempt to build an independent wealth business did not achieve the rapid growth profile they had hoped for, although it did end well, with a sale to a third party at an attractive exit price.

“That was a great outcome achieving a high valuation,” he commented. “But, we later set out to build another company and this time we pursued growth, and within about a year we built the AUM to USD1.5 billion, and we now expect to grow to about a 50-strong headcount by the end of this year and maybe we will double the headcount again by the end of next year.”

“The reality is simple, when you  hit two or three billion dollars of AUM, so many doors open for you and a wider universe of opportunities open up, insurance, property, asset management, money lending and so forth,” he added.

 

Is bigger better?

Some of the attendees did concur that the bigger the EAM, the better the EAM. “When one reaches a critical size we no longer need the private banks, even for financing, we only need them as custodians as clients continue to be comfortable knowing the banks are holding their assets safe.”

Another IAM leader expanded on this thought. He explained that his firm works with more than 20 custodian banks between Singapore, Hong Kong, Switzerland and various other jurisdictions. 

“While that is certainly not a lot of fun—there are far too many logins, and every single one requires a different process—we do this because we offer a unique concept, we are platform for external asset managers, for ex-private bankers, and when they join us we like to keep the banking relationship for their clients’ sakes.”

“For example, we have some Scandinavian clients, long-term expats in Asia, who like to keep their relationships with Scandinavian banks.” 

Another perspective emerged from the founder of an EAM that sold out to a private Swiss bank.

“Why did we do that and go back into a more corporate environment?” he asked rhetorically. “Because we found that as an EAM dealing with so many different institutions, it is costly and out of our direct control, they can change fees, move the goalposts at any time. Currently, with regulations and compliance, the costs of running a business are going up all the time, so it is pushing us towards a model where it benefits those who have economies of scale.”

He expanded on this, saying that the key was finding the right partner. “We did not want to return to a big firm with loads of red tape, and we instead found a partner that gives us both support but also keeps the door open for flexibility and some entrepreneurship.”

 

China - engine for growth, but is there a Chinese wall?

When growth is discussed in Asia, the subject almost inevitably turns to China. The panel was soon debating opportunities and challenges in Asia’s most populous and most dynamic economy.

“The real engine of wealth creation now is in China,” said one China expert. “However, although mainland Chinese investors are already becoming more sophisticated in their efforts and gradually offshoring some of their hard-earned wealth, not much is coming through to Hong Kong or Singapore yet.” 

“This means that ownership of all those HNW and ultra HNW clients in China—much of this, remember, is relatively new wealth—is not with the people around this table, the client ownership of that is mostly in mainland Chinese hands. Moreover, that money will shift out as fast as it can under existing regulations, and the methodology will be through digital means.”

Another explained that there are three core segments, one is onshore, one is near shore, one is far shore. Onshore is China, while near shore is Hong Kong or Singapore, very popular with clients with USD20 to USD30 million and gradually moving their money out of China, alighting first at the nearest Chinese controlled wealth entrepots. For far shore, he explained, Geneva, Zurich, Luxembourg, Monaco, London are the preferred centres. “This is more the new habitats for the super-rich, the billionaires, the hundreds of millionaires,” he explained.

The central theme from China now is wealth going global. “We have to form a global platform for them,” said one expert. “We have for example opened an office in San Francisco, and in the UK two years ago. More and more families fully understand what a family office or independent wealth management firm can do for them, we must be positioned to cater for this dramatic growth driven by the offshoring of China’s enormous wealth.”

For the more modestly wealthy target clients—the typical ‘premier banking’ gold platinum clients—there is a massive opportunity for fintech providers. 

According to local folklore, one fintech placed an advertisement in China and within three months had 40 million new clients for its app. “Fintechs can grow remarkably fast in China and fintech will I think definitely will wipe out the repo-banking, premier banking, or even interactive broking models.”

 

Technology to play a widespread role

The adoption of technology solutions and the use of internal or external platforms is a ubiquitous subject of excitement, and to a certain extent fear in the mainstream and independent wealth sectors. 

It seems clear that the affluent mass market will move to digital at a remarkable pace. And HNW and ultra HNW clients will be increasingly digital-hungry, especially as the more digital natives create or inherit wealth. For example, in China, the massive wealth creation across the nation is relatively new, less than 30 years old, with the bulk of the wealth generated in the past 15 years. An expert expanded on this. “Whether it is new money in China,” he said, “or somewhat older money in Hong Kong and elsewhere in Asia, online platforms—somewhat shunned by clients five to 10 years ago—are the way forward. 

“Even the older and bigger clients are less resistant, as millennials and others inherit the wealth.”

But he also added that there is still room for the custodial services of the brand name banks, as there is always the need for perceived security and safety.

  “Agreed, this is a serious point as things are untested out there,” said another attendee. “For example, what happens to the money, the assets, which are not in a bank? If it is in somewhat I might slightly provocatively call ‘cyber-secure app’ or system or programme, has that ever been tried and tested under stress? Interactive e-services make sense, but what happens really when there is a significant crisis? That is why I believe the traditional site of private banking will not disappear.”

These concerns aside, there is no doubt that going digital comprises many elements and processes, right from account opening forms, onboarding and so forth.

“Clients,” said one expert, “are now expecting real-time online reporting, they want to be able to see simulations on how the portfolios look like, they want to see things under some different assumptions and with several scenarios. It is more like financial planning. That can all be technology enabled, it is not rocket science, but you need to put it together.” Another expert explained that his firm is in the process of setting up a separately managed accounts platform in Hong Kong, working with private banks on one side and investment advisers on the other to deliver them an open platform that delivers to private clients some of the investment strategies they are looking for that would not be available normally through a fund.

“Separately managed accounts seemed to be a way of cutting down the cost for everyone, giving more transparency,” he explained. “Accordingly, the jump from mutual funds into that capability is a natural step for servicing the wealth clients in Asia and beyond. It is tried and tested in the US and will come to Asia.”

A fellow panellist added: “As an external asset manager we are not necessarily relying on the advice or investment solutions team or however you want to call it from different custodian banks. To get investment ideas, that is our skill, which we should have on our own. I do not, therefore, think that we as an EAM need to rely so much on banks’ investment ideas, decisions or advice what they are giving. So that makes it easier to move to platform providers.”

“Yes,” said another expert, “and moreover I see a trend coming from being able to reverse engineer the investment bank or the bank with platforms and digital and so forth.”

A detailed and thought-provoking lunchtime discussion ended with some of the attendees focusing on their core priorities for the year, or years ahead.

 

Boldly facing the future

“Our priority is growth,” said one leader of an independent wealth firm. “But I mean new clients, not growing the existing clientele. However, given the size of the clients we target, we are talking a small number of new clients, so that we can service our existing clients well.”

Another explained that getting a platform up and ‘live’ would be the number one priority and then build on the pipeline that they already have in terms of the private bank clients that they have. “We are not looking at the end client, we are looking at the private bank servicing their clients,” he said.

Another reported that his firm’s focus is sustainable growth and that he wants to grow organically. At the same time, he wants to further embrace technology.

“We are trying in some ways to turn the clock back,harking back to the old private bank days where our relationship managers can be client focused, very much entrepreneurial in spirit, thinking for the clients. We have no quota systems; they act on what they believe is be their conviction. Transparency is vital.”

Concluding the discussion, one of the attendees summed up some of the key messages. “These are indeed exciting times. Massive growth, especially in China,” he commented. “Technology can help us all build new business models addressing the issues raised around the table, including the drive for seamless interface, real-time data, transparency and alignment of interests.”

“We can help the IAMs and EAMs focus on what they and their RMs are good at,” he added, “namely managing the relationship, having discussions with clients on asset allocation, long-term objectives and then having access through platforms. Technologies allow you to run different business models. Now you have these turnkey solutions that enable you to rethink the whole business model around many of the issues that have been discussed today.” 

 

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