The WFH effect: why so many private banks are turning to external asset managers

As Covid-19 tightens its stranglehold over global finance, Will Lawton explains the rise behind External Asset Managers (EAMs) and why they are best placed to respond quickly to volatile markets.

By Will Lawton, Head of QUO at TradingScreen

One of the bright spots emerging from this global health pandemic must be how smoothly working from home has gone for many trading the global financial markets. Home office life has gone so well it has led some to claim that portfolio managers are making more informed decisions due to being less influenced by their colleagues. External Asset Management (EAM), also known as independent asset management, is undoubtedly benefiting from the “new normal.”

With traditional phone calls and emails to trading desks, the antipathist of remote working during unprecedented periods of market volatility, External Asset Managers (EAMs) can come into their own. Unperturbed by old technology, EAMs have proven themselves to have more sophisticated systems and to be able to switch brokers during these unpredictable times quicklyr, the rapid rise of EAMs started way before Covid-19. In Europe, roughly a third of financial assets are under the management of EAMs (Source: McKinsey), while in Hong Kong and Singapore, UBS estimates that EAMs will account for 3% and 5% of all assets under management, respectively. With these figures expected to grow exponentially over the next few years, why are so many private banks who traditionally focus on wealth management, turning towards EAMs? And, beyond remote working, precisely what the pros and cons of doing so are?

These days it is rare that one single bank can meet all manners of financial services needs. A family office, as a case in point, may want to spread their portfolio with four private banks, but also have proper asset allocation across them. Driven by increasingly complex client needs, the natural progression is to choose an agile, expert niche provider. This is where EAMs come into play. The vast majority of EAMs cut their teeth inside private bank wealth management functions and, as a result, understand them fully. Additionally, EAMs often have specialised skills not found within banks because a rigid corporate structure does not bound them.  For instance, an EAM would be able to present a sophisticated real estate credit strategy that requires a bank custodian, a fund manager, and a lender to execute.

Then there is the small matter of the continued rise of FinTech disrupters. With new fresh thinking brands making inroads into a previously oligopolistic field, more and more investors are turning to third-party specialist providers over traditional banks who are typically less agile.

Banks are sometimes weighed down by regulation and their risk-averse sensitive nature. A clear case of this is that banks are unable to deploy multi-asset online trading as their core banking system is made up of legacy software. In contrast, EAMs have no such restrictions.

Now, this is not to say that, despite the many benefits, all is entirely rosy in the EAM garden. For starters, many remain heavily reliant on banks for their expertise as custodians. While EAMs in Europe are well placed, in Asia, the lack of open banking means many still have to manage the challenge of working with various accounts across different banks. This difficult and highly sophisticated process is without question the EAM’s Achilles’ heel right now.

To overcome this issue, more and more EAMs are seeking out a way to aggregate bank feeds to produce consistent portfolio return reports. However, for aggregation solutions to be of use, they need to be connected in real-time with a bank's trading platform. What EAMs require is some form of multi-bank solution, in the cloud, that enables them to execute trades efficiently at the same time as improving client experience. And client experience can only be enhanced by gaining real-time access to different jurisdictions and by having an unprecedented amount of control over the portfolio. As interest in the EAM, business model continues to expand, it is essential technology keeps up to speed (mainly if home working is here for the duration). After all, adopting the right technology will go a long way to ensuring that external asset managers can be confident that wealth holders can manage their money most efficiently and effectively possible.