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.