The growth of financial assets in Asia may be so irresistible that this modern day gold rush will continue despite many obstacles, says Dr Mark Heitner, a San Francisco-based wealth advisor.

Dr
Mark Heitner, MD, MBA is a San Francisco-based family wealth advisor interested in
helping financial institutions develop services for the UHNW client. 

Conventional wisdom suggests that Asian
wealth represents a vast opportunity for global private banks and multi-family
offices. Banks have hired hundreds of relationship managers. MFOs are
exploring opening offices in Hong Kong and Singapore. All hope to benefit from
astonishing wealth creation in Asia.

I recently interviewed the senior managers
of five private banks in Singapore, while exploring opportunities to train
relationship managers. They represented Asian or global leaders of the top ten
global bank’s wealth management departments. None of these experts was
optimistic about the prospects of wealth management efforts. They were in
remarkable agreement about the obstacles they faced.

Here are ten reasons wealth managers will
struggle.

1)   
Clients don’t pay for
investment advice.  They meet with
financial advisors to solicit strategies, but then execute these investment
ideas themselves.

Little value is perceived
in the advice of banks. The reasons are many, including the entrepreneurial
spirit of self-made businesspersons (“I do things my way”) and also the
increased “product push” approach banks have taken preceding and subsequent to
the financial crisis.

MFOs are nascent in Asia so
the concept and reasons of paying for advice needs explanation. Their
predecessors, banks, have previously bundled the advice cost into the brokerage
revenues of the products sold.

2)   
The CFO of the family company
usually manages the family’s investments. 
The CFO is the decider.  This is a
power position from which the CFO will have little interest in being
evicted.  The CEO or patriarch is happy
to have a go-between to the advisers/bankers. The patriarch trusts his CFO more
than his bankers. 

3)   
Families make little effort to
coordinate financial strategies among family members.  More to the point, substantial family events
are often not acknowledged or discussed. A US-educated MBA holder admitted that he had divorced four years ago and that
his aunts remained unaware of this development. The intergenerational transfer of wealth is likely to occur upon the
death of the wealth creator, and not in a systematic or planned fashion. 

4)   
The founder does not want their
wealth disclosed to anyone outside the family or to a single person either. It
is common for the family to work with multiple private banks to conceal their
wealth. Each bank may have a different mandate or the same. Regardless thereof,
there is seldom an overriding asset allocation strategy or risk profile. Yet banks
are often judged by the performance of the portfolio despite these portfolios
being advised, not managed.

5)   
Families do not buy proprietary
financial products.  This typically is a
consequence of the client’s shallow depth of financial expertise and lack of
external advisors.

As a result, the private bank
business is essentially a loan business. 
Stock in the family business is used as collateral.  The loan business is price driven.  Deals have little to do with the strength of
the relationship manager’s bond with the family.  These loans are seen as a vanilla product
hence the pricing sensitivity.

However, late entrant banks
need to build their loan book aggressively in order to capture market share. As
revenues have declined (less loans, less brokerage turnover, less high margin
structured products) and costs are difficult to cut, margins are suffering
severely.

6)   
Wealth creators are not
interested in asset diversification. 
These founders reinvest profits in their business while retaining
ownership of the business. This is due
the high internal rate of return of their businesses (until now). Despite this concentration of
risk and the higher leverage prevalent in Asian portfolios, the assets of HNW individuals
in Asia fell by a similar percentage as the assets of those in the West during
the financial crisis. This further
challenged bankers’ conventional asset diversification approach and reinforced
Asians’ confidence in a “high concentration but quick exit” approach to
investments. 

7)   
The bank’s demand for financial
advisors greatly outstrips supply, so that knowledgeable relatinship managers remain highly
sought after. This may motivate the truly talented advisors to change companies
frequently. The “war for talent” due to the overcrowding of banks is already present. It decreases margins and is the chief
obstacle to banks’ growth ambitions.

8)   
The time horizon for success
will be long so that only well-capitalized institutions are likely to have
staying power.  However, those
institutions will eventually benefit from initial public offerings and merger and acquisition
activity.

9)   
 Even Mandarin-speaking natives find
establishing banking relationships to be problematic. Hiring members of the
next generation managers of family business owners may provide the best entrée
for financial institutions. That generation of business owners may have the
network of contacts in the family business world to grow family wealth
management firms. They may also find their family business culture to be
sufficiently stultifying to have interest in working in a western financial
institution.

10) The patriarch often controls his bankable assets and his company
assets until death, even if his children are well educated in financial matters
or are active in the company. The patriarch, typically a self-made man, will
retain control as long as possible.

Although the next generation of family leaders has advanced degrees,
they are constrained by traditional cultural mores and expectations.  It is not clear the degree to which they will
adopt western financial strategies for their personal wealth. Should they do
it, they may seek advisors abroad. Well trained relationship managers and a
broad range of high touch concierge services may be a good strategy for US
firms.

The growth of financial assets in Asia may
be so irresistible that this modern day gold rush will continue unabated
despite many obstacles. A consolidation is needed to cool salaries and
increasing costs, but new entrants continue to arrive in Asia and none have yet
called it quits.