Issue 101 July 2016 Lite

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ASIAN PRIVATE BANKER JULY 2016 • ISSUE 101

STRAIGHT TO THE SOURCE ASIA’S FAMILY OFFICES AND THE SLOW DRIVE TOWARDS DISINTERMEDIATION

INSIDE:

Straight Talk with Alan Luk, Hang Seng Private Bank, pg 12 COOs reveal the state of their tech strategies, pg 15 Changemaker: BNP Paribas’ Stephane Honig, pg 20 + The Scoop with Shruti Advani, pg 5

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JULY 2016

CONTENTS 4

Letter from the Editor Patient capital loses patience?

4

APB On-the-Spot Online poll results

5

Editorial The Scoop: There are no jobs

6

Editorial Crow’s Nest: The beauty (of family offices) lies in the eye of the beholder

8

Regulations Brexit 2016: Asia’s private banking community reacts

10

Industry Straight to the source: Asia’s family offices and the slow drive towards disintermediation

12

Industry Straight Talk: Alan Luk, Hang Seng Bank

14

Technology Family offices fertile grounds for fintechs

15

Technology Asia’s PB COOs reveal tech challenges

16

Technology To consort or not to consort? Private banks, tech vendors debate the viability of a shared KYC network

20

Industry A chat with... Stephane Honig, BNP Paribas

22

Industry Discretionary Portfolio Management Peer-To-Peer Connect 2016

23

People Moves Movers & Shakers

CHIEF EXECUTIVE OFFICER Andrew Shale EDITOR Shruti Advani DEPUTY EDITOR Sebastian Enberg EDITORIAL Richard Otsuki, Priyanka Boghani

MANAGING DIRECTOR Paris Shepherd OPERATIONS

Benjamin Yang, Koye Sun, Jessie Cheng, Vivien Wong BUSINESS DEVELOPMENT Madhuri Chatterjee, Sonia Lam, Sam Chan, Stacey Wong

DIGITAL DIRECTOR Tristan Watkins DESIGN Simon Kay PRODUCTION DG3 ISSN NO. 2076-5320

PUBLISHED BY KEY POSITIONING LIMITED 1205 The Dominion Centre, 43-49 Queen’s Road East, Wanchai, Hong Kong Tel: +852 2529 5577 Fax: +852 3013 9984 Email: info@asianprivatebanker.com

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LETTER FROM THE EDITOR

Patient capital loses patience?

As I sat moderating a panel discussion of family offices for a Swiss bank in May this year, I was struck by the energy and optimism in the room.

Fresh from another panel on alternative investments I had hosted the previous week, I could not help but notice the stark difference in mood – the family offices were either investing in a different universe of financial markets or they truly were able to enjoy the freedoms that come with “patient capital”.

The July edition – our 101st – is an examination of Asia’s single family offices and their rapidly attenuating relationship with private banks. Although far from a trend, there is a distinct move amongst these organisations to disintermediate private banks – is this because there is a bonafide gap between expectations and capabilities? Or is it a response to the need to contain fees in difficult markets?

Since I have brought up Difficult Markets – as unavoidable as Death and Divorce in our times it would seem – let me highlight The Scoop with Shruti Advani this month and its attempt at debunking one of the great myths of 2016 – that there are no jobs.

As some of you may know, Asian Private Banker was proud host to a COO Leaders Conversation in Hong Kong in June and, as

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a result, this issue also debates the feasibility of a KYC database shared amongst private banks.

Even as Greater China team moves dominate the most-wanted list of headhunters and their clients this summer, we sit down oneon-one with Alan Luk, head of private banking and trust services at Hang Seng Bank, to ask whether he is doing enough to attract Mainland clientele.

Thank you for all the feedback on the last issue, some of it made me smile, some of it didn’t. All of it made me think. For those of you I have met before, it should come as little surprise that every time you make a suggestion, it is keenly debated at our weekly editorial meetings. For the uninitiated, join the debate by mailing your comments to editor@asianprivatebanker.com. I look forward to hearing from you.

Until we meet again,

Shruti Advani Editor, Asian Private Banker

EDITORIAL

There are no jobs

I

all businesses. This automatically implies IFC offices. Expansion at this pace is not t’s not often I have to start a column a net addition of 80 RMs a year and given possible by cherry picking ‘books’ to buy – with an apology, but given how that in North Asia it has already grabbed this is capacity addition. Even as we watch peremptory this title may seem, I feel 47 new RMs in the year to date (50% of the implied exit of several banks from the I must. I’m sorry for its abruptness, these were director level or above), I suswealth management industry, the hiring but it is a refrain I have had to hear often pect the North Asian franchise will overfreeze at at least two banks that I know of this last month. There are no jobs, my Sinshoot its 50% of this target. has been lifted. For every boutique adoptgapore-based French banker friend said to What has changed is the mathematics. ing a “hands-off ” approach to certain marme. There are no jobs his head-hunter said On average, it costs a little over a million kets, there is an Asian giant with the ability to him. Ditto to another friend covering dollars to maintain a single relationship and the will to invest in new markets.

Asia from London, yet another who strucmanager on a large platform – costs inIn essence, the market has been cleaved tures products for private banks and one clude compensation, operational expensinto those private banks that will continue who has two decades of private banking es, platform-driven costs, support costs, to invest and those that have been forced experience, at least half of it in Asia. There compliance costs etc. With the are no jobs. bar this high, banks simply Anecdotal evidence certainIn essence, the market has been cleaved cannot afford to hire candily seems to confirm rather than dates to “give them a go”. refute this – the deep cuts at into those private banks that will continue On the other hand, evseveral banks in Singapore and to invest and those that have been forced er-evolving KYC and othHong Kong this last month er compliance requirements and the expectation that more – either because private banking makes a have made it impossible for will be announced this month negligible contribution to group revenues new joiners – however com– have sent us into a summer petent they may be – to “plug more sombre than we would or for other strategic reasons – to hit pause and play”. Again, using very have liked. I have circulated broad brush strokes, we are many resumes and made many still talking about an asset introductions this last month transfer rate of 20-40% over and haven’t had any positive six months.

– either because private banking makes a feedback on any except one. Could it be Given these dynamics, banks have been negligible contribution to group revenues true – are there no jobs? compelled to raise the bar – new joiners or for other strategic reasons – to hit pause.

Absolutely not. “I think your point may are now expected to bring US$30 million Will we continue to hear of cuts in the be that there is no real capacity for addiin assets to the bank at the AVP (assistant coming months? Yes. 5% of poor/marginal tion this year; the jobs you’re referring to vice president or equivalent nomenclaperformance turnover is the ideal attrition are more optics than anything else – banks ture) level, US$50 million at the VP (vice rate for most companies. But even those buying books from one another is the usupresident or equivalent nomenclature) that are culling in some roles/markets are al course of business,” explains one private hoping to make net additions to headbanking CEO. “There are no new jobs level and US$100 million for anyone who count this year. coming online in Asia.” Absolutely not. I is going to draw a director-level or above Take Credit Suisse for example, anotham talking about a net addition in headsalary. er aggressive employer in Hong Kong and count to the industry as a whole.

The good news? For those who meet South Asia. Despite the thousands of jobs it To those among you who are disheartthese expectations, the trappings of a bull is expected to cut globally, the bank has reened by this anecdotal evidence, let me market still apply – multi-year guarantees, iterated its target headcount of 800 RMs in offer you something to the contrary. I have hand-picked teams, access to balance sheet Asia by 2018 (it had 590 at the end of 2015). it on good authority that Julius Baer, one with favourable credit terms.

And why would it not? The region has of the most aggressive employers in the inThe bad news? For those who don’t meet provided a 20% return on capital across dustry, is adding a whole new floor to its the bar – there are no jobs.

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EDITORIAL

The beauty (of family offices) lies in the eye of the beholder

A

“We put together [the joint-venture] between the investment sia’s centa-millionaire population (those with US$100 bank and wealth management (WM) to service this strategic million or above in investable assets) will exceed segment that originates in WM but has the size and needs of 8,000 by 2025, representing a chunky 67% increase institutional clients,” Mattoli explains, highlighting the bank’s from 2015’s total, according to a recent Frank Knight decision to shift its focus away from balance sheet-intensive fixed estimate. At that account size, investors are often well-placed to income activities towards private banking. negotiate with investment banks for better terms and access.

“With wealth management being our core business, we decided Even so, the industry remains split on whether investment to use the balance sheet to back the joint-venture in two different banks have the appetite to dedicate resources to the region’s growways. First is the facilitation of trading through prime brokerage. ing mega-wealth segment.

Second is lending through Lombard loans or term financing.”

“Investment banks are deal-oriented businesses, so in lean Meanwhile, others have been tackling the space in a more times, they may be interested in hunting for smaller prey,” says nimble fashion, preferring to scrutinise each deal before involvone regional head of family offices at a major private bank. ing the investment bank. Without “But once the rain comes and being able to fully gauge business the buffalo appears, they aren’t viability – especially in such a going to be scavenging the carInvestment banks are deal-oriented nascent market – committing casses.” serious resources from the outset This illustrates a common businesses, so in lean times, they may be poses a risk to both the bottom dilemma private banks face interested in hunting for smaller prey. line and reputation. when referring business for “Some family offices come in execution. Depending on the But once the rain comes and the buffalo and say they want prime brokerseason, investment banks may appears, they aren’t going to be scavenging age, but at the end of the day they either entertain the private bank are not really trading. From our or discount it as an unattractive the carcasses. point of view, the most important business proposition. thing is getting right what family Retaining a share of reveoffices want to get done,” says nue and, ultimately, remaining Anton Wong, Asia head of key clirelevant to today’s 5,000-plus ents at BNP Wealth Management, centa-millionaire segment is, of underscoring the benefits of operating referral business between course, important for any private banking head; but at certain the two entities in a nimble fashion. times, what may be a prized transaction for one side (in terms of “For very big institutions, it may make sense to use a well-derevenue and relations) may be less compelling to the other. signed machine to facilitate business but the machine is never perfect and if you pull out, you pull out forever. Many times, ESTABLISHING A PARTNERSHIP there’s a certain piece the client wants from the investment bank Since January 2011, UBS has been operating a Global Family rather than the full suite. If you can surgically find that need and Office, a joint-venture between the private and investment bank plug them in, they are happy campers.” designed to meet the institutional demands of private banking By remaining in the dialogue, private banks will find pockets clients. of opportunity to add value where appropriate. Both UBS WM With 47% of assets allocated to alternatives, Mattoli points and BNP Paribas WM, for example, have seen significant interout that the scope for disintermediation is significant. Indeed, est from clients in real estate opportunities, where home bias and there has been an uptick in families directly accessing alternative expertise may have cut out many private banks from local deals; markets (such as real estate and private equity) or using prime but for markets clients may be unfamiliar with, foreign banks can brokerage services to develop in-house hedge fund-like strategies add value. across asset classes.

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EDITORIAL

JUMPING THE GUN

‘Calm down’ is the message coming from other players who are less convinced that the industry is approaching a tipping point where mass-producing family offices will rival the likes of Blue Pool Capital. These cynics typically point to a general reluctance to pay, to remunerate top talent and to demonstrate long-term commitment as the primary stumbling blocks preventing clients from achieving direct market access.

“I don’t even pay my own [parent company’s] CEO HK$12 million (US$1.6 million), so why would I do it for the family office?” says the representative of a renowned top-tier real estate family from Hong Kong, comparing the rate of return from the two buckets of capital and displaying an obvious bias towards the core business.

Credit Suisse estimates that a full-service family office managing an ideal minimum of US$100 million costs no less than US$1 million per year to run. UBS points to APAC as the most expensive region to run a family office, at around 115 basis points (BPS) of AUM, with approximately 93 BPS and 23 BPS going towards operating costs and external manager fees, respectively.

Yet, despite paying higher external manager fees, many Asian families attempt to keep a lid on costs by cutting back on rent, financial tools or even talent.

Indeed, many of the multi-million and billion dollar families spoken to by Asian Private Banker operate out of ragged offices in industrial districts, often situated close to the core family business.

Not only does this thriftiness ward off top talent, but the overall control still tends to lie with the patriarch or matriarch of the family, with family office heads assuming advisory-type roles instead of functioning as ‘real’ managers with full discretion over assets. Of course, advisors are accustomed to showing deals to investors whereas managers generate performance of their own volition; and without full delegation, it makes little sense to run a portfolio of individual lines, so investors revert to multi-manager strategies.

“What kind of portfolio manager would want to be reduced to an advisory role,” asks an intermediary sales head at a local asset manager that services family offices.

“The natural incentives aren’t aligned. Portfolio managers tend to be incentivised by chasing performance. He [or she]

cannot properly do the job if they have to constantly ask for permission.”

Even when families are willing to pay, not all have the fortitude to commit long-term, and recent market turbulence has not helped matters as investors have, at times, had to stand back and watch their capital sink. According to one Greater China team head, numerous families have attempted to set up hedge funds to manage their flow trades, but have not had the stomach for drawdowns, as evidenced by the closure of one just three years after being set up.

“Unlike investments,” he says, “there is no mechanism to just exit and cut losses; rents and salaries still need to be paid.”

“99% of hedge funds who use their own money to seed and hope to attract future capital fail.”

“They just end up going back to being fund of funds managers.”

Investment banks in the region are also unable to agree on how much resource to devote to this segment. Sources tell Asian Private Banker that one investment bank is planning to target Asian family offices directly by offering relevant services, such as lower thresholds for accessing prime brokerage platforms.

But others are far less enamoured with the segment, highlighting shortcomings in size, sophistication and, most importantly, the ability to consistently deliver attractive margins.

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REGULATIONS

Brexit 2016: Asia’s private banking community reacts Brexit came and went, though the effects will continue to reverberate for some time. Market-side, the initial kneejerk reaction was short lived, with Asia’s subsequent week-long rally suggesting that immediate fears over a UK exit were somewhat overplayed. Still, uncertainty remains the zeitgeist, and a brewing Italian banking crisis does not bode well for the political bloc, nor the global economy.

8 asian private banker

In the aftermath of the Brexit referendum, we polled you – our readers – on the effects of Britain’s decision on the private banking industry. Here’s what you said.

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15.06.16 07:31

INDUSTRY

Straight to the source: Asia’s family offices and the slow drive towards disintermediation

“

When news broke mid-2015 that Joseph Tsai, Alibaba’s executive vice chairman, planned to launch an endowment-styled family office, Asia’s private banking industry was quietly impressed. Tsai’s ambition portended a new generation of ‘smart wealth’, driven to create structured, well-governed entities to manage excess cash. But times may be changing, with a growing number of Asian family offices opting to disintermediate private banks and go ‘straight to the source’.

They hired me to milk every dime I can from financial institutions,” says one non-BO (beneficial owner) head of a Hong Kong private investment firm, which manages the wealth of a single family.

“And also to see where we might be getting screwed.”

According to the source, whose pedigreed career includes stints at several investment banks, he will fight tooth and nail for every basis point he can get.

The portfolio he oversees primarily consists of funds managed by those he has known and and worked alongside with for some time, and who he can access directly.

“When you can just WhatsApp your managers directly, there really isn’t a point to seeing your relationship manager,” he says, adding that he still uses the private bank for custodian services.

Such cases are not directly comparable to Tsai’s set-up, where the principal has committed to building out an entity that qualifies both in terms of size and sophistication to bypass private banks and access investment banks or direct private investment deals on its own.

But at the same time, one can find examples of disintermediation among Asia’s smaller set-ups – however slight or gradual – with families moving to cut back on the costs associated with engaging with intermediaries such as private banks, wherever possible.

STRIPPING THE SHELF DOWN

Of course, this is not news for locally renowned asset managers that have deep roots in the market, especially so for those asset managers in their early days that are seeking seed capital before they have a track record to achieve mass distribution.

Across flow trade, Asian families are also creeping into prime brokerage platforms for direct market access, most notably in Hong Kong, where families are setting up trading facilities to execute various strategies. For instance, FX strategies have been trending up among those whose core business is exposed to currency risks, especially between the Chinese yuan and the pegged Hong Kong dollar.

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INDUSTRY

Disintermediation is particularly pronounced when it comes to the ultra-rich segment and its push into fungible non-flow markets.

According a recent UBS report, APAC family offices allocated an average of 47% of assets into alternatives in 2015. Real estate alone accounted for 12% and pockets of transactions were executed in-house, especially by families with expertise in the sector, either via an external entity or directly by the operating company.

In the private equity space (28% of total APAC family office allocations), there has also been a flurry of movement. Since 2008, more and more corporate activities have been conducted in private markets independent of traditional banking channels.

In addition to pure investments, Asian families are zigzagging through the private market to sniff out opportunities that create synergies with their operating company – whether via straightforward mergers for strategic expansion or through acquiring research and development units so as to add value tangentially.

In more mature markets such as Europe, the playing field is replete with independent players, offering a glimpse into what tomorrow’s Asia wealth market might look like.

One notable example is the emergence of JAB Holdings Co., which manages the wealth of the Reimann family, Austrian owners of a multi-billion dollar portfolio featuring stakes in prominent brands such as Jimmy Choo and US fragrance group Coty, which owns Calvin Klein. Indeed, the family is today the poster child of independent M&A, having gulped down more than US$30 billion worth of coffee-related acquisitions since mid-2012, all through its private Luxembourg-based investment group.

IGNORING THE HEADLIGHTS FROM AFAR?

By conservative estimates, there are no more than 20 “real” family offices in the region, if defined as operations with a full-fledged multi-asset set-up, a robust governance framework and enough wealth that investment banks, asset managers and other counterparties will engage with them directly as an institutional client.

More ubiquitous are single-person set ups that function as allocators while doubling up as the CFO of the family business.

Here the range of capabilities can vary depending on the needs of the family. But in many cases, the fiduciary oversight, including reporting standards, is lax, and the performance is often expressed as a single figure with few quantifiable risk metrics.

“These so-called family offices are one-man set-ups,” says one Asia advisory head at a Swiss pure play, highlighting how these individuals are typically overstretched.

“And they are wearing too many hats. Can one person really play the role of allocator, product specialist, trader and analyst at the same time?”

This general lack of sophistication or commitment to fully in-source has somehow given some private banks the illusion of comfort. True, the prospect of complete disintermediation – even among the upper echelons of Asia’s 590 billionaires – does

not appear to be on the cards, at least for the time being. Indeed, Credit Suisse’s regional head of family office services and philanthropy, Bernard Fung, told Asian Private Banker late last year that many UHNW families delegate up to 50% of their investible assets – especially when they have amassed their wealth via a single liquidity event (e.g. from the tech sector). “[Such clients] will explore what the minimum is that they should do in-house, and outsource the other investment capabilities,” he said.

Indeed, the menu of differentiated services private banks offer still appeals to many ultra-wealthy clients. Balance sheets are designed to take on assets more prominently found in private portfolios, such as real estate or even art; trust or succession planning services are also unique to private banks; even due diligence processes – widely perceived as rudimentary and replicable – are appreciated by many ultra-wealthy for the ‘stamp of approval’ private banks are able to imprint on investments.

Even so, a growing number of clients are slowly but surely chipping away at the linkages between themselves, private banks and direct sources of investment or service. While not all families – however wealthy – will have the appetite to assemble expensive set-ups designed to manage individual lines in a fully diversified, multi-asset portfolio, certain allocations are being taken off the table. The rate and ceiling for disintermediation is anyone’s guess, but private banks best prepare so as not to be caught in the headlights.

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PEOPLE

Straight Talk:

Alan Luk, head of private banking & trust services, Hang Seng Bank Hang Seng Private Bank is a local Hong Kong player in the truest sense - not to mention one of the largest, with US$25 billion in assets under management as of the end of 2015.

Alan Luk, Hang Seng’s head of private banking and trust services, sits down with Asian Private Banker to discuss the bank’s Mainland ambitions, as well as the rising cost of doing business in offshore Asia.

Alan, there’s only one place to start. How exposed have you been to the Brexit outcome?

We are not sitting comfortably following Brexit – just look at the knee-jerk reaction from the markets. It’s a global issue, and so even though our clients do not have major exposure, directly or indirectly, we feel the pain because many [clients] have some exposure to UK property. So the impact [of Brexit] has been negative overall. Many of these clients hold property for income purposes so they are asking “how low can the pound sterling go?”.

My gut feeling tells me that we are not yet at the bottom.

What’s your client acquisition strategy?

Most of our core clients are Hong Kong Chinese, of course, but with China’s wealth pool growing exponentially, we are now onboarding more and more Mainland Chinese. Right now, about 50% of our new clients are Mainlanders – so for every 10 accounts we open, 5 are Mainland Chinese.

They mainly reach us through two channels: our branch network, and the Hong Kong government’s Capital Investment Entrant Scheme. This programme was ceased in 2015, but we understand from the market that there are still around 10,000 applications in the pipeline. Because we have good connections with immigration

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agents, they refer clients to us that require an investment account at a bank to fulfil their immigration qualification criteria.

Why would these Mainland investors choose Hang Seng Private Bank when they already have relations with Chinese banks with an offshore presence in Hong Kong and further afield?

It’s an interesting question. Perhaps it seems logical that Mainland Chinese who are already familiar with Mainland banks would make these banks their first choice when they go offshore. But just because it is logical doesn’t mean they will do that! When Mainland Chinese have the chance to go offshore, they will look

PEOPLE

for something different in business culture, servicing and the investment product suite.

You do not have an onshore private banking business at the moment. Any plans to set one up?

We are aware that there are strict limitations to the types of products that can be developed and sold in Mainland China. Even if I had an onshore operation, I wouldn’t have a fully-fledged product shelf and, in any case, those products that are available are very similar to what clients can get from our branch network – so there’s no differentiation.

We do have commercial banking and mortgage services onshore, with about 50 outlets in total. Many of them are located in the Yangtze River Delta and in Guangdong – effectively the tier one areas. While these are not private banking businesses, we want to handhold Chinese entrepreneurs and offer them the full range of services. These branches refer clients to our Hong Kong [private banking] office when the need is there. At the same time, if we have a private banking relationship that was forged in Hong Kong, we may refer this client back to Hang Seng China if they have mortgage or commercial facility requirements.

Will your core business be under threat when China fully liberalises the capital account?

Hang Seng as a whole always tries to take advantage of opportunities driven by economic policy (e.g. Shanghai-Hong Kong Stock Connect, Closer Economic Partnership Arrangement). In fact, we have just obtained approval from the CSRC to establish a JV with a Mainland entity [Shenzhen Qianhai Financial Holdings Co. Ltd.] to operate an asset management company in Qianhai. But for private banking, once the market conditions are ready, we will look closely to identify the best strategic approach to onshore China.

As it stands, how profitable is your private banking business?

In the APAC region, the average cost/income ratio for a private bank is 73%. We are below this mark and in a good position.

At the end of 2015, Hang Seng Private Bank had US$25 billion in assets under management, according to our estimates. This is below a widely quoted US$30 billion profitability threshold for Asia. Do you need to ramp up scale?

We are different from the European players. Many of them do not have any wholesale, commercial or personal banking in the region, so their focus is on the (U)HNW segment. To achieve scale, then, they must do one of two things: they must grow internally [organically] or they must acquire client assets externally, whether by buying another private bank or by poaching relationship managers.

Hang Seng as a whole has over 3 million clients. We have a natural, internal infrastructure to acquire private banking clients.

What’s the minimum requirement to for a Hang Seng customer to become a private banking client?

We have a minimum requirement of HK$10 million. Yes, this is

a standard industry benchmark, but the point is, the minimum requirement is really just an internal measurement to segment our clients. We have customers that don’t bother coming in to our central office because they have retired and they don’t want to wear a suit and tie. Instead they feel more comfortable talking to my branch colleagues. But the size of their transaction is sometimes bigger than a ‘normal’ private banking client. So the benchmark is only for the bank to segment. It means nothing to clients. If I am only worrying about UHNW clients, I may forget about the lower segments to my own detriment.

Markets have not been kind to investors for some time, and there is a pressing need for private banks to ensure recurring sources of income by building out discretionary offerings. Do you have plans to set up a discretionary portfolio management (DPM) service?

Our clients are traditionally hands-on and transactional in nature, and we often educate each other about what is happening in the market. But they want to be the decision makers and are not so keen on discretionary mandates. Equally, our clients are ageing and they are less keen on being involved in the lengthy sales process, especially because the market is becoming more complicated.

That’s why some are asking for DPM so long as the returns are there.

We do have plans to set up this offering but there is no timeline. We had it before but its success was less-than-satisfactory because clients typically benchmark returns – and if their performance does not exceed a given index, they wonder why they’re being charged.

Now we are investigating how to revamp our former DPM service.

Private banks are also revamping their tech systems/offerings.

This is a critical issue. A large part of banks’ C/I ratio is driven by system upgrades, IT and compliance. We need to upgrade our system so as to better deliver information to our advisors and clients to make effective decisions. We have put a lot of resources into system enhancement and digital banking, but the data flow must be secure for our clients.

Is there any demand from clients or RMs for a mobile app?

Most of the communication between RMs and clients is via the phone or in person, so I would say that at this stage there is less need. If you look at the private banking niche, it remains very close and personal, so clients still prefer to interact in real life rather than through an app.

What does the rest of 2016 hold for Hang Seng Private Bank?

Our brand name is well received by Hong Kong and Mainland Chinese. And even though China’s GDP may dip below 6.5% and suffer from structural problems, many HNWI Chinese have already taken advantage of the high-speed growth experienced during the past 20 years, so they have already accumulated a very sizeable portfolio. Their next step will be to interact with a wealth manager or private bank to invest overseas and diversify. That’s an opportunity for Hang Seng Private Bank that we intend to take advantage of.

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TECHNOLOGY

Family offices fertile grounds for fintechs

W

hile private banks and asset managers have only recently entered the digitalisation dialogue through their various partnerships and collaborations with fintech startups, family offices have been judiciously increasing their tech budgets for some time.

Being architecturally light and budget conscious, family offices’ technology investments stand in stark contrast to those made by private banks. So what are the top three investment strategies pursued by family offices when it comes to their tech spend?

middle office tools such as client reporting and portfolio management solutions.

2. Prioritising AML and cybersecurity: Just like private banks, multi-family offices must contend with complex and shifting regulatory requirements and are thus investing heavily in antimoney laundering and cybersecurity systems.

3. Trading platforms: (U)HNWIs and family offices have a growing interest in direct investing into private market investments – a trend that is playing out through emerging trading technologies.

1. Bulking up the middle: Unlike private banks, there is very little to be gained by jazzing up the front office and developing client facing apps. Instead, family offices are investing in

Asian Private Banker lists the Top 8 Fintechs (in no rank order) that are making waves among Hong Kong and Singapore’s family offices.

Fintech

Family office offering

Mesitis

Their canopy solution is a cloud-based account aggregation tool that allows users to upload statements from various banks.

Archway

A solution that helps family offices with their accounting, investment tracking and reporting.

Closir

A platform to connect global institutional investors to companies in emerging markets; the firm wants family offices to adopt its investor relations capabilities.

smartKYC

An automated engine for KYC and AML due diligence that provides alerts and monitoring.

Expertsoft

The PM1 family office module provides visual and interactive insight into investment data, portfolio modelling, risk management, asset selection and ongoing portfolio monitoring.

Dragon Wealth

A tool that combines data, social media and news via a tablet app.

SinoPac Solutions and Services

This solution provides portfolio management support platforms to clients including family offices, HNWIs, fund houses and institutional investors.

Privé Financial

A B2B modular solution that offers custodial platforms between family offices and private banks as well as a suite of financial modules covering reporting tools and workflow management.

Source: Asian Private Banker

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TECHNOLOGY

Asia’s PB COOs reveal tech challenges On 14 June 2016, private banking COOs from across Asia gathered under one roof for a morning of networking and debate around the most dynamic and challenging area of responsibility for a modern day leader: technology and digital innovation. We asked attendees at Asian Private Banker’s annual Chief Operating Officers Leaders Conversation in Hong Kong where they stand in terms of their tech strategies, and here’s what they told us.

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TECHNOLOGY

To consort or not to consort?

Private banks, tech vendors debate the viability of a shared KYC network Recent risk events have shocked Asia’s private banks into augmenting their KYC and AML processes. But as regulatory requirements intensify, collaboration may be key to reducing the burden. Asian Private Banker asks COOs and tech vendors if a shared KYC network is the way forward.

I

n an ideal world, the client onboarding process would be as swift and seamless as it is rigorous. A private banker could simply tap into an existing database to bring up a prospective client’s financial records; know your client (KYC) and anti-money laundering (AML) checks would take a matter of minutes without sacrificing accuracy; and private banks themselves would trim their share of the hefty US$1.5

billion compliance bill that lenders in Asia rack up on an annual basis.

All it would take – all it would take – is buy-in from a consortium of Asia’s leading private banks, a competent, independent technology vendor and the greenlight from local regulators.

So who’s in?

The idea itself may be utopian, but it is also timely given that the first six months of 2016 laid bare weaknesses in the industry’s KYC and AML processes.

In May, the long arm of the law caught up with BSI Singapore after the pure play was found to have committed “serious breaches of anti-money laundering regulations” and “numerous acts of gross misconduct” pertaining to the ongoing 1MDB probe. And the previous month, the Panama Papers data leak provoked private banks into reviewing risk processes, particularly with regards to politically exposed persons (PEPs).

These events, coupled with the absurd amount of time relationship managers typically spend onboarding clients, have prompted banks to find new ways to lower operating costs and increase RM efficiency, with regtech (regulatory technology) solutions coming to the fore.

Observing this trend, Asian Private Banker, at its most recent Chief Operating Officers (COO) Leaders Conversation in Hong Kong, asked 20 private banking COOs and 20 tech providers if there is any appetite to form such a consortium and to pool KYC data.

The response was mixed at best.

PRIVATE BANKING COOS: NAY!

For COOs, a shared KYC network is not going to happen any time soon. Most shook their heads at the mere men-

16 asian private banker

TECHNOLOGY

witnessed the benefits firsthand via Contineo’s product distrition of pooling data, with 90% indicating via poll that the bution. concept would not work due to sensitivities over client data and “While the solution isn’t one size fits all, a central depository wider security concerns. or resource will benefit the industry broadly,” he said.

“It’s not feasible,” remarked one Hong Kong-based COO. Furthemore, concerns over data privacy are age-old, and “Our clients will not allow this. It’s a tough proposal that will when private banks are able to overcome their fears by proinvolve coaxing our clients into giving us consent and then providing reinforced security, tech vendors will play a pivotal role viding them with constant reassurance that their data is in fact – or so they say – with many already in early-stage discussions safe.” with private banks to gauge their receptiveness to a shared KYC A fellow COO concurred, pointing out that the challenge system. would be to get wealthy clients to expose their full portfolio to Echoing these sentiments, Yashesh Kampani, head of financial a single organisation. services ASEAN at IBM, is already party to such discussions.

Less sceptical was a Singapore-based COO, who suggested “A trend that we expect to see picking up is private banks that retail banks first trial such a system before private banks looking to a shared service when it comes to meeting their get in on the act.

KYC requirements,” he told Asian Private Banker, adding that “The first step to deciding whether this concept or utility can external vendors can help banks exist in the private banking overcome their data leak fears. world is to take the preferred “While there are concerns route of testing it on retail cusAll it would take – all it would take – is about data privacy, a KYC utiltomers. This will be the litmus test,” he said. buy-in from a consortium of Asia’s leading ity with a shared database that is accessible through a third party Indeed, Singaporean heavyprivate banks, a competent, independent vendor will help make the client weights DBS, UOB and OCBC are currently discussing the technology vendor and the greenlight from on-boarding processes much more efficient and reliable.” feasibility of setting up a counlocal regulators. So who’s in?

Not all tech vendors are comtry-wide system for tackling pletely sold on the idea, however. money laundering, suggesting One participant expressed that Pandora’s box has already concerns over the impact such been opened. a consortium would have on his “When it comes to the data firm’s revenue model. itself, there also needs to be a “Many third party technology firms operate on the pay-forway of verifying the information that is fed into this system and license model,” he noted. ensuring that it is accurate,” noted another participant.

“But, with a shared network, [we may] need to change to “For example, personal data points are both quantitative and a subscription model and this could impact our short-term qualitative such as passport details and client experiences. Who capital by up to 20%. Typically this would be used to invest in will play the role of ensuring accuracy of information?” research and development.”

“How will the system work for client data sitting in different Another said that private banking clients were like “gold jurisdictions?” asked another. dust” as many high net worth investors tend to be PEPs and “And which technology vendor or industry organisation will government officials. host this shared database?”

“Resistance from these sensitive clients will lead to incomplete databases. Is it then worth private banks’ time and TECH VENDORS: YEA! money?”

Given the revenue at stake, the majority of tech vendors attendAnother vendor questioned private banks’ willingness to ing the COO event were far more enthusiastic, with 63% adopt a private cloud to host such a database. indicating that it is only a matter of time before such a database “COOs seem jittery towards using any form of the cloud to exists. store client information. That will be the first barrier.”

“The technological logistics for something like this are So the jury’s out. straightforward,” noted Mark Munoz, managing director of What is clear is that as Asia’s private banks double down on Contineo. tech blueprints to rein in spiraling compliance-related costs, Munoz oversees the consortium of investment banks that the discussion is far from dead. Indeed, there is already a sense provides structured product distribution to private banks. Natof inevitability creeping into the mix. urally, he’s a proponent of the shared network approach, having

asian private banker 17

ADVERTORIAL

Succession planning in the British Virgin Islands and Cayman Islands

W consider.

hen an individual owns shares (Shares) in a British Virgin Islands business company (BVI) or Cayman Islands exempt company (Cayman) there are various succession planning options one may

1. BVI & CAYMAN WILLS

BVI and Cayman law respects the concept of testamentary freedom and thus would not impose any restrictions on who may receive the Shares and in what proportions etc on the death of the shareholder, although any forced heirship rules which apply in the deceased’s country of domicile will take priority over the provisions of the Will to the extent they differ.

It will be necessary for the deceased’s personal representative (PR) to extract a grant of probate in the BVI or Cayman courts.

Succession to the Shares will be more straightforward if there is Will and leaving BVI or Cayman Wills is also preferable to relying on foreign Wills because it is very unlikely that a BVI or Cayman Will will be deemed ineffective under BVI or Cayman law.

Another benefit of using a BVI or Cayman Will is that providing the deceased has also left a Will or Wills in the other countries in which he holds assets his PRs can extract a grant of probate in the BVI or Cayman simultaneously with extracting grants of probate (or similiar) in the other relevant jurisdictions, thus reducing the time it takes to administer the deceased’s worldwide estate.

2. JOINT TENANCY

Two individuals may declare that they own the Shares as joint tenants. The effect of this will be that if one of them dies the surviving joint owner will automatically inherit the deceased’s interest in the Shares, regardless of any forced heirship rules and without the need for a grant of probate.

However, the advantages of holding the Shares as joint tenants are limited because this form of ownership does not offer the scope to plan for what will happen to the Shares following the surviving joint owner’s death. Indeed, unless the surviving joint owner takes further succession planning steps he or she will die intestate.

Another problem with holding the Shares as joint tenants is that such an approach would not provide any form of succession planning in the event that a common accident befalls the shareholders.

3. BVI OR CAYMAN TRUSTS

A trust is a legal relationship created when one person (called the settlor) places assets under the control of another person (called the trustee). The trustee may not benefit from the assets personally; it is obliged to deal with them for the benefit of beneficiaries or to further specific purposes. Unlike companies, trusts are not separate legal entities; trust assets are owned by the trustee and a trust will automatically terminate when the trustee no longer holds any assets.

18 asian private banker

Trusts are the most comprehensive and sophisticated succession planning vehicles on offer in the BVI and Cayman. They are favoured by clients because they provide benefits which the other succession planning options considered in this advice note cannot match. Chief among those benefits are: The BVI has specialist legislation, in the form of the Virgin Islands Special Trusts Act (VISTA), which caters for the needs of BVI trusts which hold BVI company shares. In summary, VISTA disengages certain traditional trustee duties such that while a BVI company’s shares are held in trust the directors of that company are free to administer it as they see fit, without intervention from the trustee (except in extreme circumstances).

The Cayman also has specialist legislation under the Special Trusts (Alternative Regime) (STAR) which forms part of the Trusts Law. A STAR trust may be established exclusively for non-charitable purposes, so long as they are lawful and not contrary to public policy.

Indeed, a unique feature of STAR trust is that it can be set up for the benefit of persons, the furtherance of purposes (charitable and non-charitable) or both.

4. CONCLUSION

BVI and Cayman law offers a number of options for successful succession planning specific to an individual’s needs and circumstances.

5. ABOUT HARNEYS

Harneys is a leading legal and fiduciary services firm with more than 12 offices spanning the world. We are trusted legal advisors to an international client base including all of the world’s top 30 international law firms and 18 of the world’s 20 largest banks and financial institutions. We regularly work alongside professional advisors from around the world providing legal, corporate and fiduciary services relating to British Virgin Islands, Bermuda, Cayman Islands, Anguilla, Cyprus and Mauritius law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For more information please contact: Henno Boshoff +65 3152 1937 henno.boshoff@harneys.com Singapore Henry Mander +1 345 815 2927 henry.mander@harneys.com Cayman Islands

“Truly excellent technical skills and vast industry knowledge.�

Legal 500

HARNEYS | Trusts & Private Wealth

harneys.com | harneysfid.com Jonathan Culshaw Hong Kong jonathan.culshaw@harneys.com

Henno Boshoff Singapore henno.boshoff@harneys.com

Hideki Hashiguchi Tokyo hideki.hashiguchi@harneys.com

Kristy Calvert Shanghai kristy.calvert@harneys.com

Henry Mander Cayman Islands henry.mander@harneys.com

Lawrie Kearns British Virgin Islands lawrie.kearns@harneys.com

INDUSTRY

A chat with…

Stephane Honig, managing director, head of sales, Wealth Management and Family Offices, Global Markets Asia Pacific, BNP Paribas Advisory is dead, long live advisory What do you mean when you say that advisory is dead?

What was called advisory in the past can no longer be called advisory.

I’m pretty convinced that bringing in more mathematical sophistication or complexity is no longer the key element of the game.

But that’s where BNP Paribas’ strengths traditionally lie.

That’s true – and we also adjust our value proposition and capabilities to the changing environment.

So what is it about?

When you look today at the penetration of structured product in Asia, it’s roughly 10% of assets under management at best, and when you look at the number of private bankers who are actually using structured products in the way they construct portfolios, it’s probably in the 8-10% range. So the question is, “Do I need to bring more sophistication and complexity to increase my market share within this 10%, or do I need to think outside the box to have the overall penetration of capital market products go from 10% to 15% to even 25%?”.

Amongst cash products, the percentage of cash and deposits in client portfolios in Asia is roughly in the 60% range, whereas elsewhere it’s more in the 20-40% range. Is there any good reason for this? I don’t see one except maybe time. For me the challenge is how we can make the overall pool of our business – i.e. the penetration of capital market products – much bigger in the client portfolio than it is today.

So that’s why I say “advisory is dead, long live advisory”.

Because the focus, as you say, has been on increasing penetration and profitability within that 10%?

Yes. It’s natural that everyone tries to optimize their market share in a specific wallet. I think we should also focus on growing the wallet which is available.

So how do you intend to help the industry increase the penetration to 25%?

The main difference between investing into a cash product and into a structured product is mainly linked to the ability of an investor to own the story which is backing the investment. If you are buying, let’s

20 asian private banker

say, Apple stock, you are likely to have a wider perspective on Apple; if you buy a bond, you look at how much it’s paying and the ability of the corporate to repay the bond before maturity before deciding whether it’s worth taking the risk. In other words, you have some trust in the underlying investment rationale. The investment case – the story – is simple, and you as the investor have the ability to own it and monitor its relevance over time.

And structured products?

If you buy a structured product, what are you exactly buying? You definitely invest into parameters like coupon or premium. The ability of the investor to own the investment rationale and the story is lower – which keeps the number of investors using derivatives in their portfolio to a minimum.

Therefore we need to adjust the advisory, we need to adjust what we are promoting and how we are promoting. We need to highlight the investment case and rationale and demonstrate that using derivatives brings an additional benefit. By doing so, we should be able to increase the overall penetration of capital markets products.

That’s why we [BNP Paribas] are moving from product manufacturing positioning to an investment solutions provider. We think we can bring to private banks investment opportunities with a more compre-

INDUSTRY

hensive explanation of the underlying story, so the end investors will be able to own the story much more.

How do you sell the story behind a structured product or derivative to a client?

First, by promoting the investment rationale more than the numeric characteristics of the structured product.

Second, by explaining to the client that there are multiple ways to implement a specific investment strategy (e.g. from a cash product to something more structured), and detailing the pros and cons of each implementation method.

Ultimately, sophistication is all about simplicity, and not about things that are too complex to explain and understand. The client will only invest heavily in something that he understands.

This does not strike me as overly revolutionary. Aren’t banks doing this already?

If it was happening already, we would have more than 10% of AUM invested into capital markets products, don’t you think so?

Where does the ceiling lie?

I don’t know. It probably depends on the suitability profile of each investor.

Let’s look at specifics.

Ok, let’s take an example. Most of the private banks’ strategy towards China is about playing the new China instead of some of the sectors which have been popular when China’s economy was exports-led, like banks, energy and real estate. During the last 6 months, the parameters on some of the Chinese banks have made them actively traded by private wealthy investors.

We sometimes see a disconnect between the investment strategy or rationale and the market parameters. It is important that we highlight it to our clients on a regular basis.

First, there is a real demand from clients to understand their investment strategies better and, here in Asia, clients want their RM(s) to update them regularly on their portfolio, update them on the market situation and, essentially, to educate. The way the business has been done so far is very much reverse inquiry. Clients have habits. They are trading some specific products and they tend to stick to these. Therefore you have PBs that ask IBs for the same products and in the end IBs just try to optimise pricing to gain market share.

But another dynamic is happening. Private banks are engaging more on advisory (and not just selling), education, updates; and to do this, they should be more actively supported by investment banks. Because IBs have a full picture about what all type of investors are doing, we should use that to bring more investment cases and rationale so that private banks can use this to engage, educate and advise clients.

This is easier said than done in current market conditions where targets are not being met.

I’m not saying it’s easy. But when you are in a tough market, you tend to return to your historical habits. And this is where you need to have leadership and management in place to keep the pace. What we have

been doing for the past few months is proposing more tactical ideas to clients i.e. investment cases that try to optimise the market situation – not only on parameters but also with a strong investment rationale.

That’s why we came up with a S&P New China Sectors index which aims to offer a clean way to invest into the ‘new China’ theme. It provides much more diversified sector exposure, and is designed on the back of the Chinese government’s latest five-year plan.

More generally, what we did a year ago was put together all asset classes sales – fixed income, FX, equity derivatives etc; we started engaging with clients in a coordinated manner, and we revamped our offering processes. So instead of everyone having an idea and shooting it to his or her own set of clients, everyone now discusses those ideas together, we involve our strategist and structuring team, we strengthen the investment rationale and we propose multiple products for the same investment idea. We always go with two or three different products to our client. Our aim is to give the client a chance to see what the investment strategy looks like across different implementation vehicles.

What has been the reaction from PBs to this new positioning as you call it?

When I look at the top 20-25 clients we are dealing with, when I have met with them and explained the new strategy, it has been welcomed across the board. A few have challenged us on our ability to execute it in an IB environment, where sometimes you are more transaction driven.

Particularly they have said, “Stephane, your are new, you come from the private bank, and what you are trying to achieve is something that is pretty similar to what private banks are trying to do.” I have said, “Of course, this because we need to be more relevant to the private banks.”

And probably proof that BNP Paribas is keen to pursue this strategy is they took someone from the private bank to lead this initiative. One year on down the line, everyone has been supportive towards our new positioning and transformation.

What has been the key stimulus behind this strategy?

The private banking industry has been growing rapidly over the past 10-15 years. But in 2014/15, we started to see that unless you have strong market conditions, it’s going to be tough to continue growing at earlier rates. So it became apparent that we need to listen to end clients more, because if the markets aren’t supportive, you may end up not addressing the exact value attributes clients ask you to address. We conducted a deep study and we realised that there are areas where we should collectively step up, and what I realised when I joined global markets is that the IB must better support the PB industry.

But this is not all about BNP Paribas. It is an industry play. If you want to sustain the industry, we need to address fundamental questions. How are we going to convince HNWIs to shift part of their cash into capital markets products and to do it with private banks? It’s a challenge not only for wealth management, but for everyone involved in this value chain, including investment banks and asset managers. Asian investors are great clients because they want to know why and they ask why. That’s why, in our approach, we place a lot more emphasis on the “why” which we believe is the investment rationale and investment case and we make sure ourselves that before we present an investment opportunity to a PB, it meets their investment strategy.

asian private banker 21

INDUSTRY

Discretionary Portfolio Management Peer-To-Peer Connect 2016 On 21 June 2016, Asian Private Banker’s annual Discretionary Portfolio Management Peer-To-Peer Connect brought together over 35 of Asia’s most senior DPM practitioners to debate and discuss a burgeoning business space that will only increase in importance as the region’s wealth matures.

The morning consisted of two off-the-record breakout sessions hosted by Citi Markets and Securities Services and M&G Investments, and bookended by two Leaders Conversation Panels

22 asian private banker

featuring Garth Bregman, head of portfolio management, Asia, BNP Paribas Wealth Management; Sean Cochran, head of portfolio specialists, Asia Pacific, UBS Wealth Management; Mourad Tahiri-Alaoui, head of discretionary portfolio management, Asia, Pictet Wealth Management; Bryce Wan, managing director, portfolio management group, Goldman Sachs; and Sally Wright, head of discretionary portfolio management, Asia, Union Bancaire Privée.

Relive the event with some of our favourite images from the day.

PE O PL E MO V ES

MOVERS & SHAKERS

Movers & Shakers is a monthly compilation of the private banking industry’s key talent moves.

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asian private banker