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EXCLUSIVE: The Nascent External Asset Manager Market In Asia - What's The Potential?
2 June 2016
This publication has partnered with UBS to research the external asset manager (EAM) sector in Asia, and is launching an extensive report on its development in both the main hubs of Singapore and Hong Kong, and the diverse markets surrounding these north- and southeastern powerhouses. In this feature, prominent EAM players in Asia outline how the ecosystem enabling these businesses is evolving in the region – and why this nascent model could be about to really take hold. External asset managers may be relatively new kids on the block in Hong Kong, Singapore and other parts of the Asia-Pacific region but the ascent of a younger, affluent client base and rising costs for traditional service providers should bode well for EAMs in the years ahead. Breaking free This tale will be familiar to those who saw bankers quitting dealing rooms to create hedge fund start-ups in the noughties, or who left investment firms to join private equity and venture capital boutiques.
This appears to be the impression judging by what is now quite a busy area in Hong Kong and Singapore, with firms such as Thirdrock, Abacus Capital, Swiss-Asia Financial Services and Taurus Family Office, among others, operating in this space.
For some time, wealth management markets in Hong Kong and Asia were dominated by banks, insurers, relatively few independent advisors, and a handful of large financial institutions providing asset management in-house. The idea of external managers able to play to a more “open architecture” approach was not all that prevalent, and certainly not equal to what was on offer in, say, the UK or North America. However, the maturation of the Asian market, which has seen new regulations and their associated costs rise, as well as greater pressure for performance, puts EAMs in a healthy position to break through.
“While the EAM concept is still fairly new in Asia, compared with more developed markets like the US and Europe, there is growing awareness and understanding – among both private bankers and clients – of the benefits an EAM offers, be it transparent, objective advice, a true alignment of interest, an open-architecture platform which gives clients products that best suit their needs, the holistic solution-driven approach to investment management or bespoke level of service,” Jason Lai, founder and chief executive, Thirdrock Group, told this publication recently.
“Another factor would be the transition of wealth to younger generations. With the generational shifts taking place and an increasing need for succession planning, we’re observing a marked change in the openness towards outsourcing some of their portfolio management and an increasing appetite for discretionary services, ranging from real estate and private equity to hedge funds,” Lai continued.
Lai argued that his firm and others are in a good place to capture growth. “The growth in interest in EAMs is also in part driven by the challenges private banks have faced in recent years – tougher marker conditions, increasing global competitiveness, which has put a squeeze on operating margins, and rising business costs on the back of higher levels of regulatory compliance, more complex client needs, among others – resulting in a string of consolidations. The fluid private banking landscape has led clients to consider the value and proposition of EAMs more closely,” he said.
Taurus Wealth Advisors, a Singapore-based external asset manager, said the industry is in early days but has big potential. “The EAM business is still a tiny part of the private banking industry currently. Firstly, this is because wealth is first-generation controlled and hence delegation of investment authority does not come easily to the patriarchs. Secondly, there is no benchmark for fees being charged for advice and it is a fairly foreign concept to high net worth individuals in Asia. Having said this, growth on the current low base of the business will be sharp. Growth to a point where EAMs will become a significant part of the industry like in Switzerland will take many years,” said Mandeep Nalwa, Taurus’s chief executive.
One factor that can drive the launch and growth of EAMs is bankers quitting big institutions for more independence at smaller, more independent firms. Last year, this factor was cited in an interview by Swiss-Asia’s chief executive, Olivier Mivelaz. The firm, which specialises in areas such as hedge funds, recently unveiled new funds on its platform as part of expansion in Singapore and Hong Kong.
Despite some concerns about the Chinese economy in recent months – which have not vanished – the background environment in Asia has appeared favourable for developing new wealth management models.
China’s HNW growth has resulted in a 47 per cent increase in the amount of money flowing into Hong Kong between 2012 and 2014, while Singapore has seen a 32 per cent rise. Lai also notes that the industry is seeing Chinese HNW individuals entrusting an increasing percentage of their investable assets to third parties – from an average of 25 per cent in 2009 to 65 per cent in 2015 (source: China Private Wealth Report by Bain & Company and China Merchants Bank; Deloitte Wealth Management Centre Ranking Report 2015).
When operating as an EAM, a crucial task to get right is to pick the most suitable custodian for assets. Lai explained: "To better serve our clients, support from a custodian bank that fully understands our needs and has the capability to meet these demands is crucial. To their credit, private banks have been swift to set up dedicated desks to service EAMs, recognising the importance of the fast-expanding EAM industry. How well a custodian fares, in my view, depends on various elements – its digital tools and platform; quality of sales and execution support, product range and innovation, and flexibility in pricing models.”
It may not come as a surprise that any discussion of new business models brings up the issue of fees.
“We see the industry moving steadily from commission-based fees to a fixed fee model as more clients become more receptive and benefit from the true alignment of interests in a fixed fee model,” Lai continued.
“Fee-based models provide stability in profit for firms and there is increasing regulatory pressure to move towards that model. It may be a bit of a misconception in Asian wealth management that clients are less willing to pay fees. If EAMs can deliver the value they promise, clients are willing to pay for it. That said, it is a long educational process; though we had no clients on the fixed fee model when we first started, we invested time and resources to educate our clients and have found success. Today, over half of our revenue comes from fixed fees,” he said.
What clients want
A fairly common observation is that Asia’s highly entrepreneurial high net worth population will tend to have a “hands-on” attitude towards wealth, which brings with it certain challenges in terms of the wealth management model – and the asset allocation conversation that goes with it.
“With Asian entrepreneurs, there are opportunities for wealth managers to find creative ways to monetise and create liquidity from their illiquid assets and also diversify their portfolio. There are also vast opportunities for succession planning as, increasingly, ultra-high net worth clients in Asia look to ensure a smooth transition of their wealth and businesses for successive generations,” Lai said.
“Though most are still hesitant to bring in external advisors to formalise successions, whether through a contract or lasting structures such as a trust or foundation, the concept is gaining ground. Wealth advisors need to educate their clients on the need for adequate planning to preserve and pass on their wealth. For independent advisors, opportunities lie in finding cost-efficient solutions through their open architecture platform and network of trust and estate companies,” he said.
“The approach of clients is quite diversified in our experience. But the majority, particularly the entrepreneurs, prefer direct deals because it appeals to their experience and entrepreneurialism so they have an affinity towards investing directly in companies. Sector- wise, some prefer to diversify, moving out of their comfort zone to spread risk, while others like to stay in their areas of expertise, especially when it’s in a forward-looking industry like technology or renewable energy.”
Taurus’s Nalwa, however, does not see a big impact on EAMs from getting the choice of custodian right.
“I don’t believe that a single custodian drives the success of the EAM business. The success of the business is driven by the fact that the people starting EAMs are very experienced professionals who are not looking for short cuts to make revenue. The advice is unbiased and measured and hence the clients appreciate the same,” he said.
Finally, asked whether some clients in Asia want their private bankers to join an EAM, Nalwa said: “All clients understand the benefit of unbiased advice. Consequently they feel that if the person offering the advice is a trusted person whom they have dealt with for many years then the advice will be even better as all conflicts of interest will be eroded. However, the fact that the EAM business remains fairly small albeit a growth industry, then I am not sure if the above is very common.”
This publication has partnered with UBS to research the external asset manager (EAM) sector in Asia, and is launching an extensive report on its development in both the main hubs of Singapore and Hong Kong, and the diverse markets surrounding these north- and southeastern powerhouses.
In this feature, prominent EAM players in Asia outline how the ecosystem enabling these businesses is evolving in the region – and why this nascent model could be about to really take hold.
External asset managers may be relatively new kids on the block in Hong Kong, Singapore and other parts of the Asia-Pacific region but the ascent of a younger, affluent client base and rising costs for traditional service providers should bode well for EAMs in the years ahead.
This tale will be familiar to those who saw bankers quitting dealing rooms to create hedge fund start-ups in the noughties, or who left investment firms to join private equity and venture capital boutiques.