These ultra-high net worth individuals can be beyond the reach of financial advisory and wealth management firms.
And rather than turn to private banks, many are seeking the services of independent asset managers (IAMs).
Also known as external asset managers (EAMs), they have a long history in Europe and the US but were a rarity across Asia as recently as 10 years ago.
The Association of Independent Asset Managers (AIAM) was founded in Singapore in 2011 and only opened in Hong Kong in 2015.
So, what do they do?
Independent asset management involves a client opening an account with a custodian bank, which may be a private bank, and placing assets in the account, according to a 2018 report from recruitment specialists Selby Jennings.
The client then gives the IAM authority and power of attorney as a third party to represent them in managing the investment portfolio and asset allocation.
The assets remain in an account in the client’s name at all times, but the IAM makes decisions on how the assets should be managed.
In addition to investment advice, IAMs also offer tax and succession planning along with a host of other, very bespoke services.
With the high net worth population of the region set to increase by over 40% every year over the next decade, the number of IAMs is also projected to increase – by 25% in Singapore and 50% in Hong Kong, Selby Jennings added.
The luxury of time
The projected growth of the sector is attributed to four key factors by global active asset management consulting firm Synpulse:
- IAMs are not pressured to meet sales targets, which allow them to focus on the long-term success of a relationship and to be fully aligned with their clients.
- Compared to relationship managers, IAMs provide clients with a sense of stability as they are less likely to change employers.
- IAMs typically spend more time with the client to make sure they understand their needs.
- IAMs are experts in providing the sophistication and specialisations required by the UHNW clients or families.
The Synpulse report cited a “senior market player” as saying: “We believe that the EAM model is the future of wealth management, as it is neutral and unbiased.”
How much money are we talking?
In early June, Swiss bank Credit Suisse announced a partnership with Hong Kong-based software company Privé Technologies to improve its offering to EAMs.
“In Asia Pacific, the industry has been growing rapidly, with current assets under management estimated at over $90bn (£71.2bn, €80.3bn) in Hong Kong and Singapore,” said Sascha Zehnter, head of external asset managers, private banking Asia Pacific at Credit Suisse.
To get a better understanding of the sector, International Adviser spoke with Martin Young, chief executive of Farringdon Asset Management in Singapore.
“There are around 500 licensed IAM managers in Singapore, however the majority of these firms are single family offices,” he said.
“Most look after a smaller number of clients and have an average of $250m in assets under management. There are perhaps 10 IAMs in Singapore with assets in excess of $1bn.”
Farringdon is one of those companies, having broken through the $1bn barrier in February of this year.
“Family offices have always been able to open accounts with private banks, but the concept of dedicated IAM desks and firms offering such wide relationships is relatively new in Singapore.”
With operations in Kuala Lumpur and Dubai, Young does not have direct experience of the Hong Kong market, but “we are frequently told it is getting smaller with more business moving to Singapore”.
“Most of the success of the in the IAM market in Singapore is due to the high standards of the CMS [Capital Markets Services] licence and Monetary Authority of Singapore (MAS) regulations.”
Laurent Pellet, global head external asset managers at Lombard Odier, told IA that new set-ups from bankers “are not surviving the test of time as not all successful bankers are equally successful entrepreneurs”.
“Based on various discussions with EAM partners and prospects in Hong Kong, this especially seems to be the case for the said local market,” Pellet added. “Although those newly created EAM set-ups will obtain the Securities and Futures Commission (SFC) license, they are often not managed well enough and soon thereafter are sold to investors in China who are looking to expand across the border.
“However, these new shareholders then most often lack the experience and ability to run a traditional EAM set-up successfully on all levels.
“Nevertheless, the broader ecosystem of financial service providers of which the EAM industry is part of is set for further growth in the next years.
“Recent studies have stated that Asia Pacific overtook North America in HNW wealth terms for the first time in 2015, and UHNWIs in Asia Pacific expanded their ranks and wealth more quickly than all other wealth bands.
“The fact that Asia Pacific wealth is tipped to surpass $42trn by 2025 explains why the region is such a priority for global wealth managers.”
Complicated financial planning needs
Farringdon’s Young also added that the industry is benefitting from a shift by private banks away from succession planning and tax compliance “due to regulatory concerns and a lack of professional in-house staff capability”.
“This is opening up potential for smaller, more focused businesses to assist the banks. More ultra-high net worth clients are looking to IAMs to provide a joined up, holistic solution and they are increasingly looking at private banks as service providers rather than advisers.”
This is a sentiment with which Old Mutual International’s Singapore chief executive Ian Kloss concurs.
The increasing costs of compliance, and in some cases the massive infrastructure required for many private banks to operate, creates increased costs to clients, he told IA.
“As a result, many IAMs have struck out on their own because they believe that they can achieve at least the same or better client outcomes for a lower cost and with fewer restrictions on how they achieve investment returns.”
The rise of IAMs is noticeable in Singapore, said Kloss, describing them as “a fantastic partnership of business relationships for wealthy clients with financial planning and insurance needs”.
“Another factor which is contributing to the ‘rise of the IAMs’ is the increase in the volume of new wealth and new high net worth clients in Asia. Ultimately, this leads to more individuals and families with more complicated financial planning needs; including high mobility, different international taxes and common reporting standard disclosure requirements, which all require professional advice.”
Insurance and IAMs
Kloss added: “OMI has been experimenting with IAM-related distribution for a few years and they are becoming one of our primary distribution opportunities in Singapore.
“IAMs are starting to realise that the investment returns they generate for their clients could be wiped out by market volatility or different taxes when rebalancing the portfolio or realising the gains.”
He said they are increasingly exploring the functions of insurance to “supplement their client’s planning”.
“Due to the complex needs of the high net worths and global tax frameworks, we see a lot of IAMs are considering different wealth structures like PPLI (private placement life insurance) or VUL (variable universal life) and are exploring insurance as an asset class.”