Industry

Singapore IAMs under pressure to consolidate and retain lean structure for profitability

The IAM scene in Singapore has entered a new growth stage of late, boosted by supportive regulatory developments and the rising need of HNWIs — especially those from Asia — for diversification across geographies.

But IAMs are constantly battling with two opposing forces: on the one hand, they have to achieve the “economy of scale” with sufficient AUM and fewer private banking relationships. On the other hand, they are compelled to keep their organisational structure lean and expenses low. “The key test is AUM — an IAM starting with AUM short of S$200 million will find it difficult to maintain, unless its AUM quickly rises to about S$300 million or more,” said David Toh, CEO of Sinopartners, an IAM services provider based in Singapore.

Toh asserted that S$300 million is the minimal threshold for a potentially successful IAM business. Most IAMs started their business with cornerstone clients that are able to provide the IAMs with a significant amount of AUM,” he told Asian Private Banker.

The raison d’être of IAMs

With sufficient AUM in the first place, running an IAM business can bring advantages not seen at private banks, argued Toh. For instance, IAMs that are larger in size can directly deal with investment banks and are effectively cutting out a lot of services traditionally offered by private banks.

The IAM model enables a better alignment of interest between the business and the clients. “IAMs no longer have to stick to one bank and can invest in funds marketed by various banks with the better product offering and better prices,” Toh pointed out. “Whereas a bank has its own KPIs and agenda that may not necessarily align with [the IAM] client interests.”

This may have accounted for the recent influx of private bankers joining IAMs in Singapore. But private banks still have a role to play, Toh quickly added — they need to act as custodians to the funds and make the execution.

“Private banks and IAMs work very closely together. When AUM increases in the IAMs, it will reflect in the increased activities at the private banks.”

Outsourcing and digitalisation are new priorities

“COVID-19 has brought substantial change to the industry. As a result, most IAMs have put a heavy emphasis on prudent risk management due to the unusual volatility in the financial markets,” Lee Su Lynn, chief operating officer at Sinopartners, shared with Asian Private Banker.

She observed that the clients are shifting their investment styles: they have become more frequent in trading, and are preferring shorterduration investments. “This actually translates well for the IAMs as a larger transaction volume means more revenue.”

While initially struggling with the “work-from-home” regime for lack of infrastructure, many Singapore IAMs have been quick to adopt changes with the help of government grants, noted Lee.

“Digitalisation has been one of the most considered topics by the IAM industry as the need for data security while working off-site is heightened, especially considering the continuous need to meet compliance requirements,” Lee observed. She addded that the firm has seen more IAMs investing in software and automated systems — cloud based solutions, for instance. Lee believed that the digitalisation drive is part of the IAMs’ cost-cutting exercise, so as to free up the manpower from manual reconciliation work and towards more revenue-generating activities. In addition, IAMs increasingly tend to outsource operation functions from HR to accounting and compliance roles to keep costs low.

“From a cost perspective, the cardinal model for IAMs is to aim to have between three to four key private banks — instead of splitting the AUM across ten banks — so as to maintain relationship and price competitiveness with these key relationships,” added Lee.

Consolidation inevitable for IAMs

As more players join the field to divide up the IAM profit pie, revenue certainly has appeared more stretched forsome. Against this background, Toh highlighted the necessity for Singapore’s IAMs to consolidate, either through mergers or takeovers.

“Consolidation means economies of scale, and by merging, IAMs may find themselves with greater bargaining power with private banks and investment banks and thus able to achieve a more efficient fee structure. For the IAM industry in Singapore to mature, IAMs should consolidate,” Toh asserted.

Consolidation has been taking place and the industry is anticipating more to come on the heels of the COVID-19 pandemic. More established IAMs with bigger AUMs, instead of numerous IAMs of varying sizes, would make monitoring the segment a less onerous task for Singapore’s regulators.