Private banks and wealth managers are changing. There are "Robo advisers" that give advice to clients. They conduct asset allocation and suggest rebalancing with suitable products. I suspect Roboadvisers will be used extensively on the retail market first because it is just too costly to use humans to advice small portfolios. Besides, many of these relationship managers are not properly trained any way to give advice. They merely sell things.
Advisory fees, discretionary management and profit share will be the norm in the high net worth segment of USD2 million and above. Interests of advisers and clients will be aligned as the advisers earn a percentage fee over the asset under management (AUM). Discretionary management is the norm in western countries where clients do not want to deal with day to day decisions of rebalancing and making tactical trades. Advisers can also earn a profit share of around 20% above the high water mark, which can be profitable for the firm as well as align the interests with clients.
Increasingly, charging commission on sales will slowly disappear. Clients must recognise that free advice is bad advice. The client advisers must be adequately trained. The advisers must have the following attributes:
1. Possess a Chartered Financial Analyst qualification. AND / OR
2. Have a finance and accounting degree. AND / OR
3. Have a post graduate finance and accounting degree. AND / OR
4. Have a profitable personal track record in investing.
The final point is important because an adviser in my opinion, is not qualified to advice when she does not even invest and make at least positive returns.
The Baer advantage
Thomas Meier explains why Julius Baer has managed to grow in Asia even as other banks have exited the business since 2005.
A FIRM commitment from the top and a willingness to invest - even as costs escalated - are some reasons Julius Baer managed to sink its roots in Asia's competitive private banking market, says veteran banker Thomas Meier.
In the past 10 years, Julius Baer has managed to grow even as a number of other banks exited the business.
Dr Meier is currently Julius Baer's region head for Asia Pacific and member of the executive board. From January, he will take on the role of non-executive vice-chairman of wealth management, based in Switzerland and reporting to Boris Collardi, the group's chief executive. Jimmy Lee will take over as head for Asia Pacific in January.
Today, Singapore is the "second home market" for Julius Baer. While the bank has declined to disclose the region's assets under management, it said in a recent press release that the region accounted for "nearly a quarter" of the group's global AUM. For the fiscal half-year ending in June, it reported a global AUM of 368.6 billion Swiss francs (S$525.2 billion) including custody assets.
It was ranked seventh largest by Asian Private Banker with AUM of US$78.8 billion and a relationship manager (RM) headcount of 260 in 2014.
Unique position
The bank's expansion in Asia began in 2005 when it acquired three private banks from UBS. One of these was Banco di Lugano, which held a merchant banking licence in Singapore. At that time, Banco di Lugano did not have Asian clients. The licence was subsequently upgraded.
Says Dr Meier: "Success in the end was driven by a couple of factors. One was the unique position of Julius Baer being just a private bank. Second, we worked with a board that was very supportive of developing Asia . . . It was a substantial investment, and that was the third part.
"You can't simply dabble in a market to try something out. When it comes to developing an Asian market, you need to make a substantial investment that has to be carried out from the top to all the support functions, to really go for the long term."
He added: "Having been (in Asia) since 1996, I knew what it meant to be committed. I lived through the Asian crisis and issues in 2000. Clients here are used to crises offering opportunities, but they want us to be partners to support them. When you come, you stay."
Dr Meier was with Credit Suisse for 18 years and was chief executive for North Asia when he joined Julius Baer in 2005. He joined as CEO for Asia, Middle East and Eastern Europe.
In 2012, Julius Baer acquired Merrill Lynch's international wealth management business outside the US - a move that was expected to double AUM in Asia.
Dr Meier says hiring bankers who could bring in a book of business was also a key to success here. That strategy, however, may not work for a newcomer to Asia today when regulations including anti-money laundering laws have become more onerous.
"Client relationships have become more institutionalised. That has to do with clients getting smarter about it. It gets more cumbersome to open new accounts; they get tired of shifting banks. But it is also due to the fact that to deal with complexity, to be competitive in your advice, you need a team of specialists. It's no longer just the RM on his own."
Through the years as costs have risen, the threshold for critical mass has moved up as well, Dr Meier says. Ten years ago, a private bank may have needed US$10 billion to have critical mass; today, the threshold may be between US$30 billion and US$50 billion, he says.
"You need to invest in the franchise to move up in size. That pushes out your breakeven point. When you have a crisis affecting your revenue streams and regulatory costs increase substantially, all of a sudden you have a cost increase when revenues may be decreasing. I got challenged all the time on our growth ambition in Asia.
"I really have to commend my colleagues who had confidence in this project that was absorbing resources. We said 'we have to hold on - it's critical and important that we do not waver on this'. That required an ongoing process of convincing (people) that we were on the right track. We had to deliver, and not just talk."
While the global financial crisis of 2008 ushered in more regulations, it also woke clients up to the conflicts of interest endemic in banks then. That may have held a silver lining for Julius Baer, whose "pure play" private bank model grew in relevance. "At multiple levels, there was a crisis of confidence that forced - and that was a good thing - the stakeholders to rethink their value propositions and gear up for the new world."
Meanwhile, Dr Meier believes it is a matter of time before banks begin to charge clients a fee based on AUM. For now, banks earn based on transaction spreads or commissions, and advice is free. "The client is probably quite behind in terms of the gap between what the industry wants and the extent to which clients are willing to buy into this concept . . . Regulatory change will drive this process.
"In Singapore, you're going to see that it simply doesn't make sense to get paid by transactions (where spreads) are trending towards zero. Or to get paid by retrocessions, which are not really aligned with the concept of transparency." (Retrocessions are product kickbacks or trailer fees typically paid by fund providers to distributors or banks. In the UK and Australia, retrocessions are banned. Europe has also begun to move away from retrocessions towards a more transparent fee structure.)
Creating value add
"It will also happen in Singapore. If you take out one revenue source, it forces you to rethink your revenue model. The bank will be forced to think about the value add it creates, because you can't do the same thing and charge an asset management fee.
"You have to think about a value-add component from the client's perspective that can justify this pricing model. It has a lot to do with servicing, an ongoing engagement process, the new transparency. It has a lot to do with building a framework where the client feels comfortable that there is no hidden charge. You want to be seen as an adviser, not an execution platform. We want to be paid for adding value. It's now about getting the belief across, so people say yes."
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