A decade ago, External Asset Managers (EAMs) were virtually unknown in Asia, despite being well established in Europe and the USA. Now the sector is rapidly expanding, Hong Kong and Singapore have a total of 160 independent asset management firms, and collectively manage US$91.5 billion in private wealth as of 2017.
Traditionally, investors in Hong Kong, Singapore and the Asia-Pacific region were keen on maximum control of assets. Wealth management in the region was dominated by banks, insurance firms and a handful of independent wealth advisors.
As Asian markets have matured and wealth has increased, there is a booming client base of affluent young people who are open to different forms of wealth management. There is now demand for EAMs in emerging markets such as China, Thailand, Indonesia and the Philippines, as well as powerhouses such as Singapore and Hong Kong. Since 2015, there has been more wealth held by high net worth (HNW) individuals in Asia Pacific than in the US and the HNW population is set to increase by over 40% every year over the next decade. In response, the number of EAMs are also projected to increase – by 25% in Singapore and 50% in Hong Kong.
Governments in these countries are adopting tougher regulations to address this increased wealth, resulting in additional cost and administrative burden for investors. EAMs are an attractive way to help HNW individuals manage assets in this changeable environment.
What is EAM?
EAM involves a client opening an account with a custodian bank, which may be a private bank, and placing assets in the account. The client gives an EAM authority and power of attorney as a third party to represent them in managing the investment portfolio and asset allocation.
At all times, the assets remain in an account in the client’s name, but the EAM makes decisions on how the assets should be managed.
In Hong Kong, there are three main types of EAM: family office and multi-family office are traditional models, started by Ultra-High Net Worth teams (UHNW). There is also the EAM/multi-families office, which can be either operated by a group of Relationship Managers (RMs) managing assets under management (AUM)’ for clients, or operated by a corporation specializing in areas such as asset management, insurance brokerage and private equity.
Specialist EAMS Tailored to client interests
EAMs have developed specialist service offerings including Asset Allocation, Investment Advisory, Family Governance, Estate and Tax Planning, Corporate Advisory, M&A and Private Placement. EAMs are increasingly being used to work as external advisors on lasting settlements such as successions, trusts and foundations.
The benefits for clients and relationship managers
One key advantage of using an EAM is the assurance of independence. RMs are generally paid a fixed percentage management fee, which means they are incentivized to deliver consistent and solid results, rather than being paid through commission on additional products or moving portfolios between providers. RMs are not under pressure to meet targets for selling products, generating revenue or other KPIs. This helps to ensure EAMs deliver a higher level of stability than traditional investment advisors.
EAMs also offer flexibility and a highly personalized client service. They can suggest a wider range of diversification options than a traditional bank, including alternative investments, lending solutions and customized structured products. With full independence and an overview of different service providers across various custodian banks, asset management, securities, EAMs can also provide high quality strategic advice on choosing between products and solutions and offer asset allocation advice that, first and foremost, benefits the client.
The ability to navigate regulation is an important feature of external asset management. Compared to banks, EAMs have a reduced regulatory burden and lower compliance costs. The requirements for EAMs are less onerous, for example, around the onboarding of new clients and risk control measures.
EAMs manage assets under a power of attorney, and the assets stay in the bank and are therefore not at risk. Meanwhile, the clients can have a geographic diversification by booking their assets across a range of countries, e.g. Hong Kong, Singapore, Switzerland, Dubai, etc,.
As well as less stringent regulations, another benefit of EAMs from the point of view of the relationship manager is that they typically offer a non-bureaucratic culture with flat management structures and simplified reporting lines. They also offer respite from the recent M&A activity in the private banking sector, more of which is predicted in the coming years.
Mergers in recent years include Julius Baer’s takeover of Merrill Lynch, DBS’ acquisition of Societe Generale and ANZ’s wealth management and retail banking sections, LGT’s purchase of ABN Amro Asian private banking, Coutts’ acquisition of UBP and the Bank of Singapore's acquisition of Barclay.
EAMs are always keen to attract private bankers but are now also looking beyond to investment bankers and corporate bankers with strong wealth networks in Asia, due to the rising demand for front office staff.
The Future of EAM business Models
As with any booming sector, external asset management is likely to enter a period of consolidation after the initial phase of expansion, as companies wind down or merge in order to attain critical size of around $200m AUM, which is suggested as the requirement of certain custodian banks.
It is also likely that we will see some partnerships between EAMs and banks, which will enable EAMs to reach new customers and banks to achieve stronger growth. Partnerships could help improve efficiency and deliver long, stable business relationships. They would also help to manage rising costs for both EAMs and banks due to regulatory pressures and compliance costs from regulatory parties.’
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