(Part 2) : Post Financial Crisis - A review of the business model of wealth management industry in Asia

Apologise for the late posting of my reviews. Over the past few months, I have been tied down with customer engagements and I had a major surgery. Finally, I have some breather to continue my article.

Like the 1997 financial crisis that happened in Asia, clients experienced sharp declines in AUM (Asset under Management).

Consequently, many clients were either asked to top-up their account to meet the minimum AUM size or risk getting downgraded to a lower-tier service within the Bank. We are seeing the same happening in this crisis.

How should private banks manage clients who fall below the minimum AUM criteria as a result of depreciated market values of their clients' assets without permanently damaging relationship?

This crisis has created an opportunity need for Bank's to review their relationship with their clients. However, should private banks conveniently downgrade the relationship whenever AUMs fall below the minimum threshold? Are there other options available?

On one hand, clients are complaining that they were ill-advised by their relationship managers. On the other hand, Banks are defending vigorously that the clients understood the risk of the products and "choose" to invest in these products.

The underlying argument is whether private banks owe a fiduciary duty to their clients when they offer an advise to them. Of course, ultimately the Client "chooses and decides" whether to invest in the product. However, if the Bank can offer a quality advice, would the AUMs be reduced significantly?

Despite the number of benefits presented by many private banks, the present model of offering an open-architecture product platform does not seems to bring about benefits in terms of wealth preservation and portfolio diversification.

Secondly, the client-driven advise model are not catching up fast in Asia. In this case, asian clients are partly responsible. Most asian clients are very hands-on in their investments. Most discretionary-driven models do not cater well with asian investors. It is not surprising that discretionary business contributes less than 30% to the bottom-line of most private banks.

(Part 1) : Post Financial Crisis - A review of the business model of wealth management industry in Asia

It's been more than 18 months since the world witnessed the financial meltdown that started in the United States. Many studies have been conducted to understand the impact on the wealth management industry and the possible lessons that can be learned. However, not many studies have been done on the impact to the wealth management industry in Asia. I shall share my views and observations how the various wealth management models have evolved in Asia.

Despite the diverse markets in Asia, it is surprisingly easy to categories the different types of wealth management business models here.

1. Independent Financial Advisors, eg First Principal
2. Standalone private banks, eg Julius Baer
   
3. Large private banks that exist as a separate business unit under a larger banking group, eg Citi Private Bank
4. Wealth management arm of investment banks, eg Morgan Stanley Smith Barney
   
5. Wealth management arm of brokerage companies, Sun Hung Kai Financial
   
6. Private banking arm of asset management companies, eg Schroders Private Banking
7. Private banking arm of local banks, eg, OCBC Private Bank (a.k.a. BOS or Banking of Singapore)
   

The financial crisis was essentially a crisis of declining in confidence and lost of trust. The consequences of these 2 factors can be summarized below:

1. Reduced AUMs (Asset Under Management) - Clients have to be downgraded to a lower tier service offerings, or even terminated relationship as a result of steep declines in AUMs.
   
2. Flight to Safety - Clients prefer to move into Deposits or capital-protected products
3. Flight to Quality - Clients move out of foreign institutions and into local banks
4. Tightening of regulation - Financial regulatory and enforcement reforms are expected to govern how financial institutions sell investment products to clients
   
5. Aligning compensation and rewards schemes with good risk management practices

Such consequences have far-reaching implications for all the wealth management players in Asia. Costs of operating a wealth management business in Asia are expected to significantly increase. The pre-crisis business models of operating a wealth management business needs to change.

In the next part, I will elaborate on the individual consequences and provide arguments on the current deficiencies of some of the business models.