www.asianprivatebanker.com
JULY 2017
Issue 113
IAM THOUGHT LEADERS SHARE THEIR TWO CENTS U B S ’ J O E S TA D L E R : “ W E ’ V E O U T P E R F O R M E D ”
I NSI DE
Industry: Citi’s Paul Hodes on how Citigold Private Client is learning from the private bank
Regulations: Local banks hesitant “to publicly tackle culture issues”
Philanthropy: Auma Obama encourages PBs to fund entrepreneurship programmes
APB Mandate: Blanket trailer fee ban not the best way to deliver objective advice
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ISSUE 113
July 2017
CONTENTS 4
Letter from the Editor
5 Echo Chamber Family Office/IAM IAMs and private banks must share client due diligence responsibilities, say intermediaries at PBs 6 Industry UBS’ Joe Stadler: “We’ve outperformed” 7 Regulations Regulatory round-up: AEOI preparations gather momentum; spotlight on fintech CEO Andrew Shale Editor Sebastian Enberg Editorial Richard Otsuki Priyanka Boghani Charlene Cong Nick Hedley Alice So Deena Yao Gigi Lam Managing Director Paris Shepherd Business Development Madhuri Chatterjee Sonia Lam Sam Chan Joanne Tse Stacey Wong Kale Law Olaide Ogungbesan Eldar Gainutdinov
Digital Tristan Watkins Yiyang Zhou Cécile de Buor Wilfred Lam Evy Cheung Alice Wong Samuel Chen Events Koye Sun Finance & Operations Karman Wu Jessie Cheng Martina Ngai Research Stratos Pourzitakis Production DG3
Published by Key Positioning Limited 13B Greatmany Centre 111 Queen’s Road East Wanchai, Hong Kong Tel: +852 2529 1777 Fax: +852 3013 9984 Email: info@asianprivatebanker.com ISSN NO. 2076-5320
8 Industry Fee-based growth a priority for BNP Paribas WM’s Vrielinck, Lecomte 10 Technology Julius Baer revises timeline for IT platform revamp in Asia 11 Industry Citi’s Paul Hodes on how Citigold Private Client is taking notes from the private bank 12
Family Office/IAM IAM thought leaders share their two cents
15 Regulations No local bank wants to be the first “to publicly tackle culture issues”, says HK-based lawyer 16 Philanthropy How Credit Suisse PB and UOB VM are putting their US$55 million impact fund to use 18 Philanthropy Auma Obama encourages private banks to fund entrepreneurship training programmes 20 APB Mandate “More than half ” of CITIC’s PB branches in China have launched DPM services 21 APB Mandate Blanket trailer fee ban not necessarily the “right way to deliver” objective advice, says Aberdeen Asset Management 22
People Moves Movers & Shakers
LETTER FROM THE EDITOR
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hus far, 2017 has proven to be far more positive for Asia’s private banking industry than the first half of 2016.
For one, transactional volumes for the most part have been robust and strong client demand for fund-linked notes is evidence that investors are keen to take on risk, albeit with some protection. At the same time, FMPs remain en vogue, with a number of banks successfully distributing strategies covering senior loans and EM bonds, to name but two examples. Still, many private banks are looking to shore up recurring revenue streams. A number have hired heavily for their DPM businesses since January and we have seen some thoughtful product innovation in the discretionary space, most notably by Goldman Sachs PWM, which has introduced a solution that seeks to iron out inefficiencies between DPM accounts spread among multiple banks. Flat fee advisory is also a topic of the now: Credit Suisse rolled out a digital advisory platform to private banking clients in Asia that is positioned as a “stepping stone from transactional to DPM”. In broader terms, consolidation continues, and though the region is not short on potential acquirers, true opportunities are now few and far between. Indosuez’s purchase of CIC’s private banking franchise in Hong Kong and Singapore was bite-sized as far as these things go and, barring a few businesses that appear to be flirting with an exit, it is difficult to see what the next transaction will be. We do anticipate further strategic tie-ups between offshore and onshore players, and we wouldn’t be surprised if some of these involve fintech firms with a broad catchment of prospects, particularly in China. Margin pressures have done little to dissuade Chinese private banks from pushing ahead with their offshore plans. CMB, CCB and Minsheng have all opened offshore branches and BoCom has just announced that it will establish a wholly-owned Hong Kong subsidiary offering retail and private banking services. On the reg front, Indonesia’s amnesty window closed to muted fanfare and, by most accounts, the impact on Asia’s private banks was less than initially feared (notwithstanding some predictable outflows/ account regularisation). Some banks are looking to offset reporting obligations by converting DPM solutions for Indonesian HNWIs into ‘unitised’ funds to avoid reporting each and every transaction. CRS now looms large, although most banks say they are well prepared for the rollout, even though some clients remain antipathetic. Regulators in HK and SG have been busy expanding their AEOI networks, and SFC’s enforcement of a ‘new’ client suitability clause in June has further increased the onus on private banks to keep their houses in order. Finally, private banking tech revamps – a pervasive trend over the past 24 months – have encountered some headwinds. This is not surprising given the enormity and complexity of such undertakings that, while necessary, are not without risk. Here’s hoping the run-in to 2018 is a productive one.
Cheers,
Sebastian Enberg Editor Asian Private Banker 4
F A M I LY O F F I C E / I A M
e ch o cham be r “We made three major investments in wealth management: we created the CIO office; we went long in Asia; and we went long in ultra high. All three paid off.” Joe Stadler, UBS Wealth Management’s Zurich-based head of global UHNW “I believe we have begun the process of restoring [Singapore’s] reputation.” Monetary Authority of Singapore MD Ravi Menon, reflecting on recent compliance failures by banks in the city-state “It’s becoming more difficult for clients with less assets to implement trusts meaningfully because of the costs involved – including the legal advice needed to structure it correctly – which may not make it worthwhile for someone with assets south of US$5 million.” Woon Shiu Lee, MD and head of wealth planning at Bank of Singapore “Many international banks have been conducting culture reform programmes for a while. Local banks [in Hong Kong] so far have been keeping a watching brief – no one wants to be the first to publicly tackle culture issues.” Veronique Marquis, partner at law firm Eversheds “As a matter of principle, I endorse a trailer fee ban but I’m not sure that a blanket ban is the right way to go about delivering on this principle.” Campbell Fleming, Aberdeen Asset Management’s head of global distribution, on possible regulatory action in Asia to clamp down on trailer fees “While digital KYC, including e-signatures, can improve the client experience, in the event of a hiccup in the process, manual processes are safer as clients know they can always go directly to the branch. I’m not completely sold on the idea.” The COO of a Hong Kong-based private bank on incorporating e-signatures into the KYC process
IAMs and private banks must share client due diligence responsibilities, say intermediaries at PBs
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ndependent asset managers (IAMs) and custodian private banks need to share due diligence responsibilities, including know your client (KYC) processes, say a number of IAM desk heads at private banks. “In our experience, both parties are onboarding risk, therefore both IAMs and custodian banks need to share the responsibility of carrying out due diligence,” a Singapore-based IAM head at a Swiss private bank says. He explains that custodian private banks typically perform in-depth client screenings during the onboarding process, while IAMs pass along all the necessary documentation. However, a Hong Kong-based private banking IAM head says private banks need to draw the line when it comes to client risk profiling and suitability checks when products are involved. “Once a private bank is involved in this process, this becomes dangerous territory,” he says, adding that banks should not have to take part in suitability checks for products, so as to avoid involvement in cases of mis-selling. “Suitability falls on the shoulders of IAMs while appropriateness is shared,” says the IAM head at the Swiss private bank.
A private banking expert says that ultimately, banks are responsible for due diligence shortfalls since they are registered by the Monetary Authority of Singapore (MAS) or the Hong Kong Monetary Authority (HKMA), while the IAM may only have a fund manager licence. She says there is a need for the custodian bank model to evolve, particularly as compliance costs rise and regulations become more complex. “The new standards of client data requirements worsens a prevailing problem for custodial banks, i.e. the long and complex onboarding process,” Synpulse’s Salomon Wettstein said in a report on EAMs in Hong Kong and Singapore. “Insufficient prospect management structures and lack of end-to-end digitisation with a low first-time yield rate has led to lengthy onboarding processes, poor customer experience and even poor prospect conversation rates.” The region’s IAM industry is expected to manage US$55-60 billion in AUM by 2020 – double what it currently oversees. To meet this target, IAMs will need to grow at a CAGR of 16%. 5
INDUSTRY
UBS’ Joe Stadler: “We’ve outperformed” “We made three major investments in wealth management,” says Joe Stadler, UBS Wealth Management’s Zurich-based head of Global UHNW, speaking with Asian Private Banker. “We created the CIO office; we went long in Asia; and we went long in ultra high. All three paid off.”
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“If, like UBS, you are highly structured and very disciplined around a clear set of risk parameters, you’re very good at single stock lending, then what Ravi can bring to the table is another pair of eyes when it comes to alternative and risk products,” he said.
Indeed, UBS WM’s global ultra business has grown beyond Stadler’s initially stated expectations. He entered the role seeking around 10% annualised growth in ultra AUM and has more than met this target.
Stadler is also satisfied with the bank’s return rate on ultra assets, which has remained consistent during his tenure, meaning that assets brought in today typically convert into revenues at the same ROA as when he started in the role.
“We’ve outperformed,” says Stadler, citing a current CAGR of around 12% (2009-2016), with Asia functioning as a core growth engine. “Our Asia business has more than doubled, due in large part to the wealth creation dynamics in the region, which are generally superior to the rest of the world,” he adds.
This is pertinent in the context of UBS WM’s APAC business, which consistently outshines all other geographies in terms of NNM inflows, HNW and UHNW combined. The region has been the leading contributor of new money to the bank for 12 out of the past 15 quarters, the exceptions being 1Q17, 4Q16 and 3Q15.
The bank’s own ‘Billionaires Report 2016’ shows that the number of billionaires in Asia Pacific alone climbed by 7% between 2014 and 2015 to 520 individuals, even if their total wealth slipped 6% to US$1.5 trillion over the same period. The bulk of this wealth is self-made.
More recently, the ‘long bet’ in Asia has involved the setup of a Shanghai branch in the city’s affluent Xintiandi area and a Kowloon branch that caters to lower-end Chinese clients and which also houses a ‘techhub’; and just last month, the bank said that it would add a further 100 client advisors over the next two years in Hong Kong alone to target the mid-tier HNW segment (group managing director and regional market manager Jean-Claude Humair recently told Asian Private Banker that the private bank has added 40 Greater China client advisors year-to-date).
rom his perch in Zurich, Stadler has overseen the growth of a business which today accounts for over CHF 550 billion in investable assets (end-2016) – roughly half of UBS WM’s total (ex-Americas) – and for which Asia is, in Stadler’s words, a “critical” element of the Swiss bank’s growth plans.
At the same time, Stadler points to the “premium benefit” UBS enjoys in a region where multi-banking is rife, driven in large part by structural dynamics, whereby big money is becoming consolidated and concentrated with a select few major wealth managers. “It’s very rare for us to not be considered in one way or another by wealthy clients – whether we win or not is another story, but we are always part of the process,” he says, adding that UBS saw a number of big tickets in 2016, not only in Asia but also in Europe. Still, 2016 was a year of two halves for the Swiss major, whose relatively weak first six months was offset by stronger ultra NNM inflows in the second half. UBS WM rounded out the year with CHF 27.3 billion in NNM for the ultra segment (+5.4% YoY). Momentum sustained through 1Q17, with total ultra invested assets ex-Americas reaching CHF 586 billion (+6.2% QoQ, +17.4% YoY) and CHF 989 billion including the Americas business. 2016 also saw the marquee hire of Ravi Raju, Deutsche Bank Wealth Management’s former APAC head, as regional co-head UHNW alongside Amy Lo [Raju has since been made sole head]. On the appointment, Stadler said that Raju brings to the business a “strong understanding of alternative, bespoke risk patterns”. 6
The bank said at the time that the hiring drive does not signal a change in strategy, nor does it represent a shift in focus from the UHNW space, as the bank “has the size and scale to cater for both clientele”. Indeed, in terms of focus geographies, Stadler points out that China represents “the biggest opportunity” for the bank. There is, however, little industry consensus on how best to approach the under-penetrated China market, given significant regulatory hurdles and, of course, the incumbent advantage held by local players. Even in the wider East Asia context, a number of international wealth managers have scaled back ambitions or exited outright as margins and regulations tighten and economies of scale kick in. “For businesses with only average levels of risk appetite and investible assets, Asia can be a hazardous place,” says Stadler. “The ideal solution would be to put in place a cashflow-driven investment plan and then stick to your guns. The ‘five-year plan, then we’ll see’ attitude will definitely not work.”
R E G U L AT I O N S
Regulatory round-up: AEOI preparations gather momentum; spotlight on fintech As of 1 July, banks need to keep tabs on their clients’ tax information for common reporting standard (CRS) purposes, with Hong Kong, Singapore and other jurisdictions in the region racing to expand their tax reporting networks in preparation for the first information exchange next May. There is extra pressure on Hong Kong, which has only 13 confirmed ‘tax treaty’ partners, while the Chinese special administrative region’s on-site review by the Financial Action Task Force is scheduled for just three months’ time. Indeed, tax reforms are sweeping across the region, with India having implemented what is seen as the biggest reform to its tax landscape since the nation’s independence 70 years ago. Wealth managers in the country are expected to feel the pinch of higher service taxes under the new framework. Meanwhile, Monetary Authority of Singapore (MAS) MD Ravi Menon said the city-state’s reputation as a clean and trusted financial hub is being restored after an investigation into 1MDB-related flows uncovered numerous breaches of anti-money laundering (AML) controls in the country. MAS is also relaunching its “mystery shopping” initiative whereby it monitors financial advisors’ interactions with clients.
Hong Kong, which signed a bilateral agreement with Indonesia in June, has also expressed an interest to enter the same multilateral agreement. However, though legislative frameworks are taking form, privacy remains a key concern for Asian HNWIs, according to Jersey Finance CEO Geoff Cook.
Fintech regulation And, to keep up with the burgeoning fintech industry, Singapore published a cybersecurity consultation paper earlier this month to bolster its existing regulations, while China implemented its first cybersecurity legislative framework in early June. In Hong Kong, independent asset managers and family office practitioners say they want more communication with regulators and a uniform KYC checklist, with some noting that regulators are “reluctant to engage with us”.
Forging ahead with AEOI preparations As of 1 July, financial institutions must collect tax information on clients from most of Hong Kong and Singapore’s automatic exchange of financial account information (AEOI) partner jurisdictions. Hong Kong and Singapore have been signing bilateral agreements in order to expand their partner networks, and to ensure they are adequately prepared for the implementation of the AEOI scheme. To speed up this process, Singapore signed a multilateral agreement in June, meaning that the city-state effectively entered into a network of 93 information exchange jurisdictions.
MAS, which is of the view that “regulation shouldn’t outrun innovation”, has signed its eighth and ninth bilateral fintech agreements, with Denmark and Thailand, respectively. And, in another move that points to its ambitions to be the leading fintech hub in the region, Singapore will allow banks to conduct or invest in “permissible non-financial businesses” such as e-commerce and digital payment platforms. In rival hub Hong Kong, Norman Chan, CEO of the Hong Kong Monetary Authority (HKMA), said the regulator wants to see a healthy balance between convenience and investor protection, while the Securities and Futures Commission (SFC) said it hopes to see more technology providers “supporting compliance in a more general perspective”.
Compliance officers feeling the heat According to a survey conducted by Asian Private Banker, AML officers are highly stressed amid the swathe of new regulations. This comes as recruiters say that the compliance hiring spree has died down for financial institutions, which have largely filled these functions.
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INDUSTRY
Fee-based growth a priority for BNP Paribas WM’s Vrielinck, Lecomte “We have all the systems, platforms and products to enable us to reach a good level,” said Vrielinck, adding that the APAC business leverages its global framework to deliver fee-based solutions. “If I compare this challenge to my experience in Switzerland when I started as CEO, our penetration was good but not at the level where it is today. We increased it by 15-20% in terms of DPM and contractual advisory for the simple reason that we reorganised our execution process and were focused.”
“We have all the systems, platforms and products to enable us to reach a good [DPM penetration] level” Region-wide push for DPM, flat-fee advisory growth Asia currently remains some way behind Europe, where delegated private client assets account for over 20% of the total asset pool, according to data from State Street Global Advisors. Still, in 2016, DPM assets at private banks in Asia increased by 9.3% YoY to total US$120 billion, and over half (58%) of all respondents to a recent APB Mandate survey reported positive net inflows into discretionary mandates in 1Q17. Pierre Vrielinck CEO APAC, BNP Paribas Wealth Management
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ierre Vrielinck, BNP Paribas Wealth Management’s recently appointed CEO for APAC, has told Asian Private Banker that an important part of his mandate is to increase DPM and funds penetration in the region, as the private bank looks to shore up recurring revenue. Vrielinck, who was joined by Vincent Lecomte, co-head of BNP Paribas Wealth Management for the conversation, said that the private bank’s funds penetration in Asia is currently “a bit lower than average” (11% in 2016 according APB Mandate data), while its DPM penetration rate is also below the industry average of 8%, going by APB’s internal estimates. However, Vrielinck expects penetration levels in Asia to rise as the bank further “improve[s its] execution”.
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A sharp downturn in transaction volumes last year (some private banks recorded as much as a 30% drop), brokerage margin compression and regulatory tightening have underscored the virtues of DPM and predictable revenues in Asia, where transactional business remains a dominant income stream. At BNP Paribas WM specifically, around 75% of revenues come from client transactions, according to former APAC CEO, Mignonne Cheng, who spoke with Asian Private Banker last August. BNP Paribas WM is not the only private bank to sharpen its focus on flat-fee business, as evidenced by a flurry of DPM-related hires year-to-date, including Julius Baer’s appointment of Ancus Mak as director in its CIO office and HSBC Private Banking’s hire of former UBS WM executive, Michael Christo, who joined the lender as head of discretionary for Asia. Recently, UBP said that it has seen its DPM penetration rate in Asia reach “double-digits” on the back of a 35% increase in discretionary assets since its Coutts acquisition last year,
INDUSTRY
“We need to train and re-explain to RMs what the key features of DPM are – both from a risk and performance perspective – and then help them to select those clients that may be suitable” while the Asia head of a Swiss pure play recently told Asian Private Banker that he had seen a 40% net increase in delegated assets since the start of the year. In terms of flat-fee advisory, Credit Suisse Private Banking recently rolled out CS Invest – a digital service that Francesco de Ferrari calls “a stepping stone from transactional to DPM”. UBS WM already has its own digital advisory platform in UBS Advice, while a handful of other private banks in Asia provide non-digi flat-fee advisory services. Building a DPM business in Asia is not without its challenges, however. DPM heads say that RMs’ knowledge of the solution is, for the most part, below par, and over half of all wealth managers do not use DPM sales as a key performance indicator. Many banks rely on top-down directives or the ‘goodwill’ of senior RMs to drive DPM sales, while product innovation is minimal with traditional multi-asset mandates dominating, albeit often with an Asia bias. For Vrielinck, however, the key to increasing flat-fee penetration lies in RM education. “We need to train and re-explain to RMs what the key features of DPM are – both from a risk and performance perspective – and then help them to select those clients that may be suitable,” he said. Meanwhile Lecomte, who has run the French lender’s wealth management arm alongside Sofia Merlo since 2011, believes that client delegation plays into the hands of the client and the bank, insofar as both parties’ “interests are fully aligned”. “This is the best way to generate good returns in a controlled manner based on full transparency in terms of fees,” he said. Challenges aside, over 50% of respondents to a recent APB Mandate survey said that they expect a 50-50 split between between transactional and fee-based income in Asia by 2027, while DPM penetration rates are forecast to reach between 10% and 20%.
Mignonne Cheng’s succession process “transparent” and planned Vrielinck was publicly announced as APAC CEO in April this year,
Vincent Lecomte co-head, BNP Paribas Wealth Management
succeeding Cheng, who had overseen the business since 2009 (Cheng remains APAC chairman). Many in the industry were surprised by the bank’s decision to replace Cheng with a relative newcomer to the region. However, Lecomte, the man who made the appointment, said that the succession plan “had been in place for some time”, with Cheng directly involved in the process, which was “transparent” from the outset. “Pierre has a very strong track record within BNP Paribas, most recently as CEO for wealth management in Switzerland and Emerging Markets, where he successfully developed and transformed our franchise,” said Lecomte. He added that the Asia wealth business is a “very important business line for the group”, today accounting for over 20% of total private client assets globally. In APAC, BNP Paribas Wealth Management had US$74 billion in AUM at the end of 2016, according to Asian Private Banker, ranking it eighth in the region (ex-China onshore). Lecomte told a media briefing in Singapore recently that the bank aims to be among the top five by AUM.
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TECHNOLOGY
Julius Baer revises timeline for IT platform revamp in Asia
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ulius Baer has refined the “go-live plan” for its IT renewal project in Asia, with the bank adopting a staggered rollout approach, according to an internal memo seen by Asian Private Banker.
Julius Baer said in a memo recently that “despite significant progress made compared to DR1 (dress rehearsal 1) and good momentum”, it has reviewed the launch of the project in Asia, which is dubbed JB 2.0 Asia. The Swiss pure play said it had decided to go live with the implementation of Temenos’ core banking platform, T24 Golden Master, over the last weekend of June. A “static data go-live” will follow, while the final stage of the project will be completed by the end of September. “The staggered go-live approach will enable a gradual increase of platform stability… and reduce overall project risk,” the memo stated.
In its November 2015 strategic review, Standard Chartered said it would invest U$250 million from 2016 to 2018 to “upgrade capabilities and build a single global platform” for its private banking and wealth management units in Asia, Africa and the Middle East. In March, the bank made a series of changes to its senior management team tasked with overseeing the tech revamp. UBS Wealth Management expects to complete its global tech revamp, 1WMP, by 2018. The project sees the bank streamlining its internal IT operations onto a single platform. The Swiss lender expects to roll out the new platform in Asia by the third quarter of this year.
Tech blueprints Alongside the tech revamp project, Julius Baer has been involved in a number of other tech initiatives over the past year or so.
The bank said in February 2015 that the project, which involves a renewal of Julius Baer’s IT platforms globally to “deliver improved client experience, operating efficiency and flexibility”, would be completed in Asia in 2017.
In February, the lender launched its mobile banking platform in Switzerland with tech vendor, CREOLOGIX, noting that the firms are in the “early stages of planning” in Asia. Last November, the Swiss pure play backed Singapore-based independent asset manager Crossbridge Capital’s digital advisory platform, Connect. Julius Baer is the issuer of the actively managed certificates that are being rolled out on Connect.
Julius Baer said at the time that the project would target Asia first because “volumes” in the region represent close to 25% of the group’s business and therefore Asia “serves as an ideal template for future implementation in other regions”.
And in 2015, the lender adopted AxiomSL’s platform to automate its group level and Swiss entity Basel III calculations and reporting. It was also the first private bank to sign onto the structured product distribution consortium, Contineo.
A spokesperson for the bank declined to comment on the revised plan.
The lender is one of many private banks in the region to have embarked on wholesale overhauls of their IT systems and core platforms. 10
INDUSTRY
Citi’s Paul Hodes on how Citigold Private Client is taking notes from the private bank From its technology capabilities to its ‘next-gen’ programmes, Citi’s high net worth (HNW) business mirrors the American lender’s private bank in a number of ways, Paul Hodes, Citi’s wealth management head for Asia, tells Asian Private Banker in an exclusive interview. Paul Hodes
Citigold Private Client (CPC), the HNW division, was launched in 2010 and services clients with US$1-10 million in investible assets. CPC sits under Citi’s consumer banking segment, allowing clients to gain access to both “traditional retail banking services as well as private banking-like capabilities”, Hodes explains. The business accounts for a “significant part of the US$218 billion that represents [Citi’s private banking] total AUM in the region”, Hodes says, adding that with client relationships “deepening and widening over time”, CPC’s AUM has grown by double digits both YoY and YTD.
example, CPC clients are given access to “some private banking deals” such as IPOs, through designated allocations. Hodes adds that, for the funds business, CPC leverages the private bank’s due diligence capabilities. “The bank is open architecture, we are not tied to a fund house like some competitors,” he says.
Next-gen programmes Hodes says that part of CPC’s strategy has been to constantly learn from the way the private bank caters to its ultra high net worth clients.
Meanwhile, Citi Private Bank has also provided CPC with a template for hosting next-gen programmes in the region, Hodes says.
Digital portfolio analysis tools
“This year we just completed our first specially curated regional next-gen programme for the children of Citigold Private Clients in Singapore,” he says.
For instance, CPC emulated the private bank’s portfolio analysis system, which helps the bank’s UHNW clients analyse products – from private equity to lending deals. CPC built a digital tool called Portfolio 360 with external tech vendor Privé Financial for its HNW clients. “The tool supports our relationship managers and portfolio counsellors to help them make recommendations with their clients,” Hodes says, adding that the platform was fine-tuned to cater to the lower wealth tier specifically. “Portfolio 360 is aimed to benefit our entrepreneurial clients to help them understand their company stock holdings’ correlations and concentration to their investment portfolio, carry out stress test scenario analyses and rebalance their portfolios.” This year, Citi added a feature for its “more sophisticated” clients, allowing them to analyse their real estate holdings and better understand the concentration of risk related to their real estate investments, Hodes adds.
Product access and due diligence Hodes says the HNW business and the private bank also work “very closely” in terms of delivering advisory and product services. For
“In June, we had representation from eight markets in Asia with 40plus attendees, including a partnership with Wharton, Facebook, Citi Innovation Lab and the Citi Design team. The participants received the opportunity to learn about the wealth management business, exposure to design thinking, and a chance to interact with a number of entrepreneurs and innovators.” Citi Private Bank hosts five-day programmes for its next-gen clients in Hong Kong and Singapore. Globally, the American private bank has been hosting next-gen programmes since 2002. However, apart from targeting clients in different wealth tiers, Hodes notes that there are some key differences between Citi’s HNW business and the private bank. “A key differentiation from the private bank in addition to the wealth tier targeted is that we help HNW clients with transactional banking, lending and other consumer banking facilities and digitisation is a big focus for us.” 11
F A M I LY O F F I C E / I A M
IAM thought leaders share their two cents The challenges facing Asia’s independent wealth managers, while multifarious, have done little to dent the industry’s optimism. Over 80 attendees at Asian Private Banker’s annual IAM and Multi-Family Offices Leaders Conversations in Hong Kong and Singapore this month were candid about those tailwinds and headwinds shaping their businesses across a number of fronts, including profitability & sustainability, talent, products, regulations and, of course, private banks’ servicing. Here, we share the perspectives of three thought leaders who spoke from the sidelines of the closed-door event. the quality of revenue growth – challenging though not impossible to measure.
Eric Goh, head of investment strategy, ThirdRock Group
Noor Quek, founder and CEO, NQ International
Urs Brutsch, managing partner and founder, HP Wealth Management
The IAM/MFO industry in Asia is forecast to manage US$55-60 billion in client assets by 2020, which would require a CAGR well in excess of what the PB industry is growing at. Do you think this forecast is truly useful for benchmarking the IAM/MFO industry and, more specifically, what is the best measure of the current state of independent wealth management in Asia? Noor Quek, founder and CEO of NQ International Not really. The IAM/MFO [industry] is still in its formative stages and PBs will still hold the fort by 2020. They are still better structured and better placed to serve the HNW segment. Urs Brutsch, managing partner and founder of HP Wealth Management I think that the numbers are possible to achieve. It would indicate that the IAM sector would grow faster than the industry as a whole, which is what I expect. Whether the sector is ultimately a success story can be measured in a number of ways, i.e. AUM, number of firms; but in the end it will be down to whether firms are profitable. If they are, it will inevitably attract more senior bankers into this space. Eric Goh, head of investment strategy at ThirdRock Group AUM is a typical quantifiable barometer of health and growth in the wealth management industry, along with net income and the growth associated with it. However, the IAM/MFO industry is still pretty fragmented and may require further definition for the data collection to be meaningful. Figures aside, there are perhaps more meaningful but intangible benchmarks such as client satisfaction, client stickiness, as well as 12
Do you expect consolidation to pick up in the IAM space, and is this a ‘good’ thing? How different do you expect the IAM/MFO industry to look a decade from now? Noor Quek Consolidation will definitely happen as many of the smaller IAMs/MFOs will not be able to cope with increased costs and substandard staff. However on a consolidated basis with niche providers within the consolidated structure relating to wealth management services, I see in a decade some of the restructured IAMs/MFOs looking like existing boutique private banks serving sophisticated clients and thus offering competition to private banks who refuse to change with the times. Urs Brutsch It is too early for consolidation in Asia – the sector is too young. There may be the odd merger or acquisition, but I believe that this will remain the exception. I would expect the industry to be in great shape, with more firms, and all of them with more scale. The IAM model is a fairly expensive business model, and it requires a certain scale to be able to be profitable.
“Figures aside, there are perhaps more meaningful but intangible benchmarks such as client satisfaction, client stickiness, as well as the quality of revenue growth – challenging though not impossible to measure.”
F A M I LY O F F I C E / I A M
Eric Goh Yes, we expect a gradual and constant consolidation to take place which can be a boon for the industry. Profitability and regulatory demands are key considerations that will drive the firms into thinking about their value propositions. To fully unlock the value propositions of the IAM/MFO model for clients, we believe that IAMs/MFOs need to be scalable in order to be a comprehensive and holistic solutions provider that takes care of a client’s entire balance sheet. Consolidation is almost inevitable in any rapidly growing and evolving industry. With it, clients stand to gain as IAMs/MFOs constantly adapt and re-strategise to redefine their value proposition, bringing greater value and service to clients [and] further enhancing professional standards in this industry. Driven by Asia’s growing wealth and wealth maturity, as well as the value propositions of IAMs/MFOs, this will be an exciting decade of growth for independent investment managers in Asia. Currently, IAMs oversee about 5-6% of Asia’s assets under management (AUM), compared with Europe’s >30%. As wealth matures in Asia, coupled with strong growth in the region, we expect the number of IAMs to increase and gain a larger share of Asia’s AUM. While the IAM concept is still relatively new in this part of the world, growing awareness and understanding, among both private bankers and clients, of what IAMs can offer – open architecture, client-centric model, independence, etc. – will see this space becoming increasingly important and one of fastest growing segments of the financial industry. How has the regulatory environment contributed to the growth of your business? How could regulators and independent wealth managers work better to develop the space? Noor Quek It has definitely helped us in that we need not sound as if we’re bringing in new rules into the system as this is now a prerequisite within the industry. Clients either fall in line or fall out. Banks which have been lax also have to fall in line. Regulators and independent wealth managers must provide continuous training for staff at ALL levels and share best practice so practitioners have more clarity on what’s necessary as there’s no one-size-fits-all in this business but there IS a basic standard of due diligence required which must be followed. Client education is also critical and must be consistent. Urs Brutsch I don’t think that the regulatory environment has anything to do with the growth. The regulations apply to all participants and there is no room for arbitrage. In Singapore, the AIAM (Association of Independent Asset Managers) has been successful in getting engaged by the MAS (Monetary Authority of Singapore) in regular sessions to exchange notes. This has without a doubt helped to make the IAM model more visible and I think it also gave the regulators a certain amount of comfort that the industry as a whole is a responsible partner. Eric Goh The regulatory environment has been very supportive of industry
“The amount of new forms the banks invent, or regular ‘repapering’ exercises are largely self-inflicted by the banks. I sincerely hope that at some point common sense will find its way back into the banks.” growth. As the IAM model continues to rapidly gain traction among clients, custodian banks, bankers and regulators, support from the latter as ‘gatekeepers’ is clearly one of, if not, the most important part of the equation. The MAS has been supportive of this industry, building a constructive working relationship through constant dialogue, giving EAMs a voice very much equal to that of banks in Singapore. This benefits not just practitioners in the space but more importantly clients who are the ultimate beneficiaries of regulations that drive best practices, culture and conduct, which in turn drives client confidence. What kind of progress have you seen in terms of private banks enhancing their servicing of IAMs/MFOs? What kinds of pain points need addressing here? Noor Quek IAMs/MFOs should never look upon themselves as being intermediaries and expect that the banks will do the bulk of the work. IAMs/MFOs also [should] not be enticed to banks which offer retrocessions – which will be phased out – in order to ensure that clients get the best-in-class solution. Key pain points: inconsistent standards, lack of clarity of clients’ matters due to lack of trust by clients. Direct client contact rather than relying on gatekeepers is essential. Industry participants must replace ‘I’ and ‘my’ with ‘we’ and ‘us’. Urs Brutsch Not much progress. In fact, banks are making it increasingly difficult. The amount of new forms the banks invent, or regular ‘repapering’ exercises are largely self-inflicted by the banks. I sincerely hope that at some point common sense will find its way back into the banks. If a bank wants to considerably increase market share, it will achieve that by offering the IAMs an automated data feed into their PM (portfolio management) system free of charge. Eric Goh How well a custodian fares depends on various elements – its digital tools and platform, quality of sales and execution support, product range and innovation, and flexibility in pricing models. 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 IAMs, recognising the importance of the fast-expanding IAM industry. Regular dialogue is key. 13
F A M I LY O F F I C E / I A M
One area where custodians can make a big impact is investing in their IT platforms to ensure execution efficiency, process integrity and quick responses to market trends. Take, for example, real-time online platforms with consolidation and ad-hoc reporting features. Improved execution services like transparent pricing and ease of retrocession calculation are also areas to consider. At Thirdrock, the choice of custodian is very much led by the client’s preferences and individual circumstances, though as advisors, we provide guidance when necessary. We approach it very much from a client’s perspective, weighing critical factors such as service levels – whether the bank has a dedicated EAM desk, how swiftly problems or errors are resolved, etc.; product offerings – depending on the client’s risk appetite and investment profile; technology platforms, and so on. Together with our clients, we evaluate custodians annually to address issues such as what they are doing to add value to the relationship. In terms of client onboarding and KYC, how keen are you to see a shared KYC database and, if so, what needs to be done to achieve this? Noor Quek Each organisation should be responsible for their KYC responsibilities, but in the interests of the organisation and the industry, basic info not related directly to the net worth can be shared. Strict confidentiality must be maintained by all organisations at all times. Urs Brutsch That is a long shot. I am however convinced that in the not too distant future we could see the emergence of a ‘portable’ KYC, which would allow clients to open relationships with banks easily. If such a standard can be developed, and is of course endorsed and accepted by the regulators, then this would be a great breakthrough. It would raise the level of KYC and at the same time reduce the amount of work required to open new relationships. As we move towards full transparency, this should not meet with resistance from the end client. What issues are you facing in terms of finding suitable talent for your team? Are private bankers better off joining an existing setup or going it alone in the current environment? Noor Quek Talent here within the industry tends to be concentrated and silo [in nature] and very much a to-each-his-own mentality. A consultative team-based approach is still deeply lacking even within the private banks – [which] reflects poor leadership and stewardship. Creativity and broadbased thinking is deeply lacking and younger participants who do try to bring new ideas tend to be overlooked. This must change. Urs Brutsch We find it difficult to have senior bankers join us. We have a great platform to offer, but too many RMs don’t seem to see the benefits of the IAM model. If they were to put themselves into the shoes of their clients, they would probably be more likely to see the merits. The industry as a whole has enough RMs, I think it is more a problem of quality rather than quantity. I can easily hire underperforming RMs, but that is not a sustainable path. Whether a banker sets up his own shop or joins an existing firm is a difficult question. I think that the advantages of joining an established IAM
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outweigh the disadvantages of starting from scratch. To run an IAM means to assume managerial and administrative responsibilities, which often are the exact reasons why a senior RM would consider leaving the bank. Eric Goh Plugging the talent gap is a persistent challenge in the industry. Attracting and retaining talent with attractive remuneration, job satisfaction and a conducive learning environment are key, but equally important is the need to empower our client advisors with a broad-based understanding and macro view of trends, the investment landscape and regulatory framework so they can offer more tailored investment options for better investment solutions. Thirdrock has been quite successful in bringing on board experienced wealth management veterans who have all hit the ground running. Apart from identifying the right talent, the firm plays an important role in hothousing and developing talented people with the right client-centric philosophy, high ethical standards as well as a constant improvement of their technical competencies and knowledge. And we achieve this with robust internal sharing and external training. For a private banker to set up their own IAM, there are a few key considerations – the rising costs of regulatory compliance, the level of operations complexity, robustness of the risk management framework and defining their value proposition so as to build a scalable and sustainable business. Given these barriers to entry, private bankers today may be more inclined towards joining an established platform to benefit from a fully integrated and experienced team to perform the necessary compliance, operations and administrative tasks. They can leverage on the platform’s advanced proprietary IT system and preferential terms with a panel of top-tier banks to build their business. This is what Thirdrock has built over the years to bring value to our clients and client advisors. Are you keen to see your local independent association put in place a mentorship/training programme for younger talent? Noor Quek ABSOLUTELY! But it must be relevant, showcasing role models. Urs Brutsch Yes, absolutely! I am a big fan of the Swiss model of the apprenticeship, coupled with further studies. This model gives young people a great path into the industry and it allows them to get valuable job experience throughout their studies. I would be happy to participate in the development of such a model. We have been great believers in interns, and will continue to offer internships to local and overseas students. Eric Goh Yes, and indeed from every IAM/MFO too. Grooming and nurturing the next generation is critical to the longevity of any industry. This should not just be the responsibility of an external agency but one that every IAM/MFO needs to assume. The younger talents have every opportunity to benefit from the rich experiences, values and knowledge that the veterans can share and impart to upkeep high professional standards in the industry.
R E G U L AT I O N S
No local bank wants to be the first “to publicly tackle culture issues”, says HK-based lawyer “We all understand that it takes time for a company’s culture to change – it’s not something that can be done in a short period of time,” Marquis says. “And even if there is a good culture, compliance breaches will still happen, but the risk of systemic misconduct will be reduced – it is more likely that misconduct will be spotted and acted on, and regulators have been known to take a more lenient approach to enforcement if the bank can show it has taken culture and conduct risk seriously.”
More clarity provided
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hile financial institutions in Hong Kong – including private banks – need to have appropriate ‘bank culture’ frameworks in place within the next eight months, local players have been hesitant to lead their peers on this issue, says Veronique Marquis, partner at law firm Eversheds. “Many international banks have been conducting culture reform programmes for a while. Local banks so far have been keeping a watching brief – no one wants to be the first to publicly tackle culture issues,” Marquis tells Asian Private Banker.
The concept of bank culture – which broadly refers to corporate values, governance and risk management frameworks – has become relatively well known in Western countries, according to Marquis. For instance, the UK’s Financial Conduct Authority said in 2015 it would start conducting reviews on how culture enhancement programmes were promoting sound behaviour at banks. In March this year, the Hong Kong Monetary Authority (HKMA) published a circular in which it offered practical suggestions on developing solid bank culture frameworks, based on three “pillars”: governance, incentive systems and assessment and feedback mechanisms. The contents of the circular will be included in statutory guidelines later this year, Marquis explains, while authorised institutions will need to develop self-assessment programmes based on which the HKMA will conduct inspections from March next year. At a recent Eversheds media briefing, bank representatives said they are concerned about not having enough time to design and implement the necessary changes.
“At first glance [bank culture] may all seem a bit vague, but if you look at the bank culture reform circular, there is a lot of very prescriptive content, and it will be turned into a chapter of the supervisory policy manual,” Marquis says. The HKMA acknowledges that there is no “one-size-fits-all” approach, according to Marquis. As an example, Marquis says “it is up to the banks in Hong Kong whether they want to set up an incentive system [encouraging employees to report transgressions], from an encouraging phone call and a dinner with the CEO, to monetary awards which could be, as in the US, expressed as a percentage of regulatory fines that the bank has to pay as a result of the whistle blow”. Incentive systems should “not only sanction misbehaviours, but also promote positive behaviours”, according to the HKMA circular. Meanwhile, the regulator says institutions will need to establish performance-rating capabilities in order to measure employees’ adherence to corporate values, while banks will also need to ensure that remuneration is not overly determined by reaching sales targets. “This is largely to reduce staffs’ incentive to design or sell unsuitable investment products in order to get a bonus or promotion,” Marquis explains. Bank culture reform has been on the HKMA’s agenda since at least November last year, when the regulator’s CEO, Norman Chan, publicly discussed the importance of promoting healthy bank culture with central bank governors from London and New York. Chan cited examples of misconduct to illustrate the importance of incentive-linked bank culture, including mis-selling cases at “a number of large UK banks” and Deutsche Bank’s mortgage-backed securities sales in 2008. 15
PHILANTHROPY
How Credit Suisse PB and UOB VM are putting their US$55 million impact fund to use of commitments came from Asian UHNW clients. Many UHNW clients are entrepreneurs themselves and, as such, are interested in familiar sectors or those related to their businesses, for example, healthcare, renewable energy and agriculture. We also saw interest from millennial clients who have gone to top universities around the world and are cognisant of impact investing as a strategy for achieving social change and poverty reduction. On a related note, we are actively working with INSEAD and the University of St. Gallen to provide guest lectures for MBA students on impact investing. APB: How is the capital being put to use? JB: Capital deployment must be prudent yet consistent. The fund is likely to make 10-12 investments, with an average size range of US$2-8 million. As at July 2017, six deals have been approved by the investment committee of the fund, and it is anticipated that two further transactions will be completed by year-end.
Bernard Fung, Credit Suisse Private Banking’s family office and philanthropy advisory services and wealth planning services team head
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sian Private Banker speaks to Bernard Fung (BF), family office and philanthropy advisory services and wealth planning services team head, and Joost Bilkes (JB), head of responsible and impact investing for the Asia Pacific at Credit Suisse Private Banking, about the lender’s plans for its US$55 million impact investing fund – a partnership with UOB Venture Management. APB: How much did Credit Suisse and UOB Venture Management ultimately raise for the impact fund, and what is the fund’s mandate? JB: The fund achieved a final close of US$55 million in December. Although Credit Suisse has been active in impact investing for 15 years, this is the bank’s first Asia-focused impact solution where we partnered with UOB Venture Management, providing exposure for ultra high net worth clients and external investors to invest in small- and medium-sized enterprises whose businesses address key social challenges. The fund invests in China and selected ASEAN (Association of Southeast Asian Nations) member countries, including Indonesia, Philippines, Thailand, Vietnam, Cambodia, Myanmar and Laos. The target geography reflects the range of attractive investment opportunities in companies with innovative approaches to social challenges encountered by the poor. APB: Can you give us a breakdown of the fund’s investors? BF: The fund was showcased to approximately 200 clients. Nearly 80%
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The fund mobilises the extensive networks of UOB Venture Management and Credit Suisse. The objective is to build and scale companies which offer sustainable, profitable solutions to social and, in some cases, environmental challenges. For example, the first deal by the fund was in a nutritional supplement manufacturing company in China which has a profitable business. The company provides supplements to infants in poverty-stricken counties across the country, targeting conditions like child stunting, anaemia and general malnutrition. Another compelling investment is in a fertiliser company based in one of southern Vietnam’s poorest provinces. The company has developed controlled-release ‘smart’ fertilisers, which reduce greenhouse gas emissions associated with rice cultivation by 80%, while increasing yields by nearly 20%, resulting in higher incomes for poor farmers. APB: Does the fund prioritise social impact or financial performance? JB: The fund is seeking to have a profound demonstration effect on investors and asset managers across the region in the following way: investing in companies in which the commercial performance and profitability is predicated on the achievement of social impact, and vice versa. The nutritional supplement company we invested in is a perfect example. The greater the reach of the fund, the greater its impact and therefore the higher the profitability. The investment team believes, as borne out in its transactions, that there need not be any tension between achieving positive social outcomes and generating attractive financial returns.
PHILANTHROPY
Joost Bilkes, head of responsible and impact investing for the Asia Pacific at Credit Suisse Private Banking
APB: What is UOB Venture Management’s role in these deals? JB: We are leveraging UOB Venture Management’s footprint and network in Southeast Asia and China, collaborating on deal sourcing. UOB Venture Management is responsible for all financial and investment-related aspects of the fund. As the impact advisor, Credit Suisse assesses the suitability of investments from a social and poverty-related perspective, and identifies opportunities to add value to transactions as they develop. As such, Credit Suisse participates in the due diligence process and investment development phases of the transaction cycle. Importantly, in the interests of both transparency and publicising the fund’s approach and achievements, we regularly provide opportunities for clients to visit investee companies and engage directly with the entrepreneurs in our portfolio. APB: Can you explain the metrics you use to assess impact? JB: We are mindful that companies can be over-burdened by measurement, which has become an industry in itself in the impact investment community. The fund’s results framework has selected key, manageable metrics – for example, employment generation, number of beneficiaries positively affected and so on – to be assessed on a semi-annual basis. This is complemented by a far more in-depth annual development impact report, which provides quantitative and qualitative analysis of the impact of our investments. The first such report is due for publication in November 2017. With regards to the fund, we want to be fully transparent to our investors. For example, we hold investor meetings to keep them in the loop, and some investors have travelled with us for field visits. APB: And when do you stop measuring the impact of an investment? JB: Upon exiting the investment. APB: Is the dearth of data, and therefore the lack of track records for such investments, an issue for your clients? JB: In Southeast Asia and China – unlike India, Africa and Latin
America – there are few impact funds which focus on expansion capital opportunities in the US$2-10 million space, and which adopt a commercial approach to impact investment. It is not so much the paucity of data that is the problem; rather, the fact that many impact funds raised to date have been small and focus on relatively small transactions in so-called ‘social enterprises’. Not only is the risk profile of such US$0.5-2 million deals far higher – venture capital risk, in essence – but they are far more intensive and have a higher likelihood of failure. The returns are simply not commensurate with the risk. In engaging with clients, it was critical to differentiate our lower-middlemarket fund with such opportunities. APB: What challenges have you faced in the deployment process? JB: The challenges are akin to those faced by any well-run private equity fund. Identifying entrepreneurs who are aligned, share the values of the fund and seek long-term partnership for value-creation is always difficult. Fortunately, the networks of both UOB Venture Management and Credit Suisse are sufficiently robust and that supports our deal flow. Another challenge is that communications on the ground can be tough at times in non-English speaking countries. APB: Have you encountered any regulatory scrutiny when advising on the fund? JB: Credit Suisse adheres to the very highest standards in compliance with all relevant regulatory bodies in Singapore, and in the countries where the fund invests in. APB: What is next in the impact investment pipeline for Credit Suisse’s private banking clients? JB: In addition to our Asia-focused impact solution, we are currently working on a bespoke solution in the education sector and a client group investment related to conservation in Indonesia and Malaysia. 17
PHILANTHROPY
Auma Obama encourages private banks to fund entrepreneurship training programmes Auma Obama, project leader at Kenya’s Sauti Kuu Foundation, speaks to Asian Private Banker about the challenges that NGOs face as a result of being dependent on donations from philanthropists. Speaking on the sidelines of the UBS Philanthropy Forum Asia, Obama shares her thoughts on how private banks can have a positive social impact. Is it difficult to measure social impact when there is no standardised framework for this? Yes it is, but we are able to because we concentrate on the individual. For example, we have a young girl in our programme, Evelyn, who was very shy. She could not look up at you or raise her voice to speak when she first joined us. After a five-day camp, in which her strengths were recognised and awarded, she gained confidence, found her voice and began to participate more actively. Evelyn is still shy, but now she can and does express herself. These are changes that are very hard to capture in a report. [However] accountability is of utmost importance in our line of work; from how the funds are being used, to what’s the impact, and what is the exit strategy. What were the main obstacles to overcome when setting up the foundation? When I first started, one of the biggest hurdles of running an NGO was working with beneficiaries. It is like herding cattle – it’s very unpredictable and this required more management of funds.
What is the purpose of your foundation and which communities does it aim to benefit? My foundation is very young – we started 4-5 years ago with the vision to give children in Kenya sustainable, economic independence based on locally available resources. The model questions the definition of being ‘poor’ and strives to use community-led advocacy, which involves listening and hearing what children want to do with their lives, to empower them. I always say, ‘Don’t give them a fish, don’t give them a hook – ask them instead if they even want to eat fish at all!’ Our programmes include workshops on personality and character building, on identifying and developing potential talents, and education on agricultural technologies, crop diversity and other environmental management [tools] for farmer families. We also have a vocational centre and a sports centre.
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Where do most of your donations come from? A significant portion – 99% – comes from Germany, where I used to work and have longstanding relationships. Some from the US, but we are trying to diversify. What is the toughest aspect of raising and deploying funds in this space? There is a level of hesitance from donors when it comes to paying for top talent. Typically, donors will want to give to a programme and will want to see that children are recipients of their funds. However, it’s important to note that like any business, in order to deliver high quality products and services, you need to invest in manpower. Another challenge has been dealing with the management of the process. NGOs often need consultants to broker any agreements between the beneficiary and the charity, however due to stretched
PHILANTHROPY
funds, NGOs are often vulnerable to consultants that appear affordable but are inexperienced. We have experienced this too. Without a project manager, you are very vulnerable to the calculations of a consultant. There often is a mentality among many of the NGOs in Kenya that they must follow the cause of the donations otherwise they will lose the donor. This is of course very restricting, therefore it’s important for NGOs to negotiate their terms before they accept any donations. How much does your surname, Obama, help with raising funds? It certainly makes funding easier with my surname and association with my brother. It opens doors, that’s for sure. Do you think there is an opportunity for NGOs to replicate the increasingly successful impact investing model? Yes, I believe there is but it needs to be structured with great care and with adequate technical support for the recipients. We need to ensure that we do not create dependencies caused by beneficiaries getting themselves into debt as happened in some cases with microfinance initiatives. Sauti Kuu, as a non-profit, cannot yet talk about impact investing. What we are trying to do is be a sustainable organisation. We are building a centre of our programmes that we hope will at the same time generate, through various programmes such as renting out spaces at centres, funds that we can plow back into our programmes.
“Private banks like UBS Wealth Management can invest a certain amount to fund projects that train in entrepreneurship so that we can equip young people with the tools to enable them to become entrepreneurs” Maybe in five years, once my charitable foundation is more mature, we can talk some more about impact investing. What can private banks do to help move the conversation forward? The funding received to do charitable work cannot be used for impact investment. However, private banks like UBS Wealth Management can invest a certain amount to fund projects that train in entrepreneurship so that we can equip young people with the tools to enable them to become entrepreneurs. Once equipped with the necessary financial and management skills they can then be the recipients of the social impact investments. This form of involvement can yield a higher return on investment than just investing in their businesses. It would be an investment in their training as well as their business and hence a social and financial return on investment.
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A P B M A N DAT E
“More than half” of CITIC’s PB branches in China have launched DPM services The two largest Chinese private banks by AUM, China Merchants Bank’s private banking arm and Industrial and Commercial Bank of China (ICBC) Private Banking, launched their DPM services in 2014. In Asia, particularly in China, self-made high net worth individuals (HNWIs) tend to exercise a high level of control over their own investment decisions, which means Asia’s DPM penetration rate lags other regions. According to APB Mandate data, DPM assets at private banks in Asia reached a record-high US$120 billion in 2016, a 9.3% increase YoY. This translates into a penetration rate of around 8% of total AUM. In Europe, DPM penetration rates are at least 20%. However, clients in Asia are expected to show greater appetite for DPM services as their needs shift from wealth creation to wealth preservation.
More than half of China CITIC Bank’s private banking branches in China have started offering their clients discretionary portfolio management (DPM) services, which the private bank launched less than four months ago. A person familiar with the matter tells APB Mandate that 20 of the private bank’s 38 branches in China now have active DPM client accounts, for which all buy and sell decisions are made by portfolio managers.
As such, CITIC Private Banking sees DPM as a key pillar for attracting new capital from private clients moving forward.
Private banking to remain under retail division for now Meanwhile, the bank will keep its private banking operations under its retail bank until the HNW business matures and is able to acquire clients independently, the source says.
Within a month of the launch of this service, CITIC had RMB 1 billion under management in DPM accounts, according to media reports. The minimum investment amount for CITIC’s DPM service is RMB 30 million.
While separating the two divisions would allow for a higher level of operational flexibility, the development of a stronger private banking brand and greater competitiveness, such a move could result in the private bank losing access to retail banking clients, which could weigh on profitability, the person said.
Global allocations into all major asset classes
China CITIC Bank launched its private banking operations ten years ago.
According to the source, CITIC’s DPM service takes a global diversified investment approach, targeting equities, fixed income and alternatives. International asset exposure will largely be gained through qualified domestic institutional investors and the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connect programmes. The person added that the launch and development of DPM services will help the private bank to outgrow its reliance on commission fees.
China’s DPM market has room to grow For the most part, DPM remains a new concept among China’s private banks.
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According to the source, China’s lack of regulations covering private banking specifically, as well as the unique demands of Chinese HNWIs, meant banks were operating in uncharted territory when the country’s private banking sector began to rise a decade ago. Most major banks in China ended up folding their private banks into their retail divisions, which means that parallel structures remain uncommon in China. Bank of China, ICBC and China Minsheng Bank (CMB) have all folded their private banking units into their retail divisions.
A P B M A N DAT E
Blanket trailer fee ban not necessarily the “right way to deliver” objective advice, says Aberdeen Asset Management accountants or lawyers, there are clear signs that people are willing to pay fees where there is value.”
Product platforms revamped In addition to greater regulatory scrutiny and improving investor protection, asset managers are under pressure to generate alpha as markets prove increasingly difficult for active managers. A recent S&P report claims that 86% of all active equity funds underperform their benchmarks, including 98.9% of US equity funds. This, combined with a greater focus on fees, has led to an industry-wide product platform rationalisation process, with many banks opting to work with fewer asset managers. “In the past 5-10 years, what has been evident for banks is that it has becoming increasingly difficult to maintain the quality of their product platforms,” Fleming explains.
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lthough it is widely accepted that regulators in Asia will ban trailer fees in the future, Campbell Fleming, Aberdeen Asset Management’s head of global distribution, says a blanket ban may not be the best approach, adding that fully transparent fee structures would be preferable. “As a matter of principle, I endorse a trailer fee ban but I’m not sure that a blanket ban is the right way to go about delivering on this principle,” Fleming says, adding that costs to investors have gone up in jurisdictions where such an approach has been taken. Fleming says Asian investors understand “value” better than “price”. He adds that disclosing all fees would show clients the real cost of advisory services. This would, in turn, allow clients to gain a better understanding of the true value of advisory services. “There are plenty of cases that have demonstrated that consumers in the region have an eye for brands, high quality service and good products. So rather than implementing a complete ban, I believe that full disclosure by banks about attribution of fees, be it the retrocession or the cost of advisory, will allow clients to make an informed decision about the value and force banks to further enhance their service to command the right price. “By breaking up the individual components, it is easier for investors to price the value of this advice. If you think about other professions like
“Many have realised how difficult it is to consistently pick the top percentile, especially while chasing a 90-day moving average. In addition to transactional costs and the amount of time required, the end result is an excessive diversity of products which, when combined, often reverts to the mean. “But it is a much more realistic goal to develop platforms housing managers with second quartile performance or above. As a result, many private banks have chosen to build deep relationships with fewer asset managers rather than superficial ones with many.” Although the trend of consolidation will likely place pressure on asset managers that have limited capabilities or that fail to outperform meaningfully, Fleming says there will always be room in the industry for managers that are able to demonstrate consistent outperformance or which invest in relatively esoteric markets. ETFs have benefited from the push towards lower fees, due to their lowcost nature. These passive instruments gathered nearly US$12 billion in assets over the past 12 months, with the US ETF market alone ballooning to over US$3 trillion. But while the growth of ETFs is unlikely to reverse any time soon, Fleming has doubts about whether or not such levels of growth will be sustained. “There are several reasons for this,” he explains. “Firstly, rates are still low and longer-term schemes with liabilities will have to rely on other sources for growth and yield. Secondly, investors are starting to view the promise of index-minus-fees as not particularly exciting. Finally, there is a social perspective to be considered: is it really sensible for a society to allocate capital on an asset-weighted basis rather than to the best performing company?” 21
Mover s&Shaker si samont hl yc ompi l at i onof t hepr i vat ebanki ngi ndus t r y’ skeyt al entmoves . Foraf ul l ver s i onofMover s&Shaker s ,l ogi nor r egi s t erat : www. apb. news / emag